Avoiding Breakaway Protocol Missteps

In a botched breakaway broker attempt, a team of Merrill Lynch advisors who left for Morgan Stanley in April were caught trying to remove boxes containing confidential customer information. Merrill filed a temporary restraining order demanding the Alabama brokers return its trade secrets to its Birmingham, Ala., office. The brokers opposed the motion, but the judge sided with Merrill, apparently impressed with evidence that included video surveillance of the brokers entering the office over the weekend before they resigned from Merrill.

Although the case remained under adjudication, its early developments provide a cautionary tale to breakaway brokers who might be tempted to take license with the strictures of the Protocol for Broker Recruiting. Prior to the Protocol’s adoption by major brokerage firms in 2004, lawsuits between departing brokers and their former firms were pretty much automatic.

But the occurrence of a temporary restraining order (TRO), much less one that a court approves, is a sign that something has gone terribly wrong.

“It’s not that common that people would be that far away from complying with the protocol,” the Beverly Hills-based securities attorney Patrick Burns told me in an interview for Research’s sister publication AdvisorOne.com in May. “The court found they did in fact do the stuff they were alleged to have done and there was a video camera that saw them come in and out over the weekend. That makes it extremely hard to defend the case,” he said.

What’s more, Burns said the Alabama team may well have compromised its relationship not just with Merrill but with Morgan Stanley as well.

Speaking in general terms, and not commenting on the Alabama case, Burns said that “when you get yourself tied up in a TRO proceeding … you’ve now entangled [the new firm’s] legal folks and they’re looking at a very large legal bill just to show they’ve done no wrong.

“The other thing is it now sets poor expectations in terms of the rest of the relationship. It raises concerns that other people will come out with new disclosures regarding client privacy or other matters,” Burns added.

Perhaps worse than merely damaging relations with the new firm, after ruining the relationship with the former firm, is the risk of nullifying financial aspects of the recruitment deal. If that deal contained a promissory note based on bringing over most of the assets managed at the previous firm, but the advisor now brings over just, say, 20% of the assets, the hiring firm will likely not hand over the funds based on the broker’s failure to perform as expected, Burns said.

While these cases are rare nowadays, the Alabama case is a reminder that brokers “can’t just take whatever [they] want” without fear of consequences, Burns said. In the attorney’s view, there are seven steps that an advisor looking to leave his firm should unwaveringly follow:

Step 1: Get good legal counsel.

According to Burns, some advisors fail to work with someone qualified in this area, though often the trouble arises from a client not following his attorney’s advice rather than the failure of the attorney to understand the protocol that is at issue. Burns, though based in California, works with brokers from across the country.

Step 2: Take the advice you’re given and follow it to a T.