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Professional Decisions: Key Terms in Retention/Recruiting Packages

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More than Money: Critical Terms in Retention/Recruiting Packages

A number of times in the past, including in the recent Merrill/Bank of America transaction, I have been called upon to represent large groups of advisers jointly in the negotiation of retention arrangements. In addition, I have represented hundreds top advisers over the years negotiating recruiting packages related to changing firms or leaving to start their own firms.

While the economics of switching firms are very important, other contract terms can be the most critical. In this article, we highlight a few of the most common and most critical issues.

1.) A Free Look or a Free Offer?

A traditional component of recruiting or retention packages is a loan, in the past often structured with forgiveness over time, but today more often, for tax reasons, structured as a loan with a separate agreement providing for series of bonus payments. You get the loan up front, and pay it off over time, and receive bonus payments that would be used to make the loan payments (although the bonus will have tax withholding, while the loan amortization still must be paid in full). If at any point you are no longer with the firm the loan is due and payable in full, and the bonus payments stop.

The amount paid in a retention or recruiting deal is generally based on your trailing 12 months of revenues. As we all know, an adviser’s revenues can fall through no fault or lack of effort of the adviser. If an adviser on recruiting or retention deal had their revenues fall significantly, the bonus payment could make them a loss center.

Almost every contract in the industry makes the adviser terminable at will, with or without cause. Obviously, there would be a great incentive to terminate an adviser losing a firm money, or to pressure them to renegotiate their deal. The adviser thought they had a recruiting bonus, the adviser did not realize it was an earn out, or a “free look.”

This is where “cause” protection becomes critical. The cause provisions have many variations of structure and language, but in general provide that if you are terminated without ’cause’ you would receive the balance of the unpaid bonus payments, the loan would be paid and the after tax benefit of the deal would be obtained all at once.

The definition of cause must be reviewed and negotiated carefully. The point is not to obtain a windfall, it is to make sure the firm would not terminate you without very good reason, just because the deal is no longer economic.

2.) The Ability to Enforce Your Rights.

Rights are no good if you can not effectively enforce them. Many firms will have a loan document that provides that if they sue to collect the loan they get attorney’s fees. The loan may even come from an affiliate other than the broker-dealer and provide they can sue in court to collect in a place that is inconvenient for you.

The documents may also contain onerous restrictive covenants, and may provide that you agree upon any violation they can get a restraining order or injunction against you, sometimes agreeing that they can do so in court in a distant pro-employer state, and that you agree to pay all their attorney’s fees and costs if they obtain an order or injunction.

However, there is often nothing that says if you sue them, in arbitration or otherwise, and you prevail, that you get attorney’s fees and costs.

If possible, the objective is to make sure you do not have to litigate in inhospitable forums make sure that if you prevailed in any action, you would be granted attorneys fees and costs.

3.) Indentured Servitude

No matter how carefully you negotiate a contract with a firm, you can not fully control the future. In spite of the fact that you might be required, at least on the face of the contract, to repay a loan or forfeit cash or stock, you may find it necessary to leave for new firm. Or the lure of starting your own advisory firm may become irresistible.

Your information base with client profiles, their basic contact information, personal items such as the names of their children and their birthdays, even if the client is also a personal friend, depending on the state you work in and the contracts you have signed, may belong completely to your employer.

Depending on the state you work in and what you have signed, you may be restricted, or prohibited, from soliciting or even contacting your clients even after you leave your employer. Your employer may have had you sign a “garden leave” provision.

While the level of enforceability may depend on the state in which you work, such provisions in general require you to give anywhere from 30 or 120 days notice of your intention to quit, during which time the firm will pay you a base salary but you are still an employee and they can order you to sit in an empty room without a phone and to not contact your clients while other advisers are soliciting your book of business. Sometimes the stock plans or other documents have forfeiture provisions, even possibly related to stock you thought was “vested,” triggered by breach of any of these covenants.

If you leave with the prohibited information, leave without giving the required notice, solicit clients or staff before or after you leave, you face the possibility for a court ordering you not to do business with your clients for some period of time, and you also may face major damage payments and an order to pay attorney’s fees of your old firm, and of course your own attorney’s fees.

The threat of litigation could severely impair your career plans. The new firm will likely make you sign a representation that you did solicit or take any information in violation of any contracts or rules that may be applicable in your situation.

If you misrepresent anything, it may void your recruiting agreement, be grounds for termination with cause. And you will not be able to hide what was done, and may have to testify under oath and penalty of perjury about what you did.

The lesson? You have to read everything you sign and sign for, initially and on an ongoing basis, and carefully negotiate all areas involving these restrictive covenants and confidentiality, or trade secret, provisions.

Many major firms are a party to something called the “Recruiting Protocol.” Under the protocol, if someone moves from one signatory firm to another that person can take basic client contact information (nothing else) and can solicit the clients in spite of any non-solicit agreement.

Firms will tell you that you have no need to worry about the restrictive covenants in their documents since they have signed the protocol. So what is the problem? Any firm can resign from the protocol at any time without notice. The protocol does not apply if you move from or to a firm that is not at that time a signatory.

Steven Insel is a broker-dealer and investment advisor attorney at the firm of Jeffer, Mangels, Butler and Marmaro LLP in Los Angeles , where he represents many international institutions and boutique firms. He has represented hundreds of the top- producing advisers in moving between firms and setting up their own firms.


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