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Ex-Waddell & Reed Team Sues RIA for Holding Them 'Hostage'

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Four years ago, a team of sister California financial advisors, seeking to gain full control of their business and freedom to offer much more than proprietary products, said adios to the BD with which they were affiliated for 16-plus years.

But instead of winning liberation, the FAs were held “hostage” for “ransom” when they decided to part ways with the registered investment advisor they joined because it failed to live up to their expectations, George Miller, partner in Shustak Reynolds & Partners, the advisors’ attorney, tells ThinkAdvisor in an interview.

As soon as they left the RIA — later that day — partners Beth Westburg, 56, and Laurie Lipman, 51, brought suit in federal court charging the firm, Good Life Advisors, with fraud and breach of contract.

Miller, in San Diego, argues that when the hybrid FAs, formerly affiliated with Waddell & Reed, informed Good Life they were leaving, the firm tried to “strong-arm” them into staying so it could continue to collect its large portion of their revenue.

The FAs also allege that Good Life “fraudulently misrepresented” that they would have full ownership of their clients, Miller says.

These and other claims are “baseless” and “legally deficient,” according to attorney Bryan Ward, of Holcomb + Ward, in Atlanta, who is representing Good Life.

“We’re denying all their claims and will [continue] to contest them vigorously,” Ward says. “Their action is meritless.”

The most recent action brought by Good Life is a motion to dismiss the team’s claims on the grounds of lack of jurisdiction and failure to state a claim. A hearing was scheduled for Jan. 14, 2019; but Miller filed an opposition to the motion on Dec. 4.

Earlier, when the team asserted its complaint in federal court, Good Life tried to move the case to arbitration with the Financial Industry Regulatory Authority, even though Westburg and Lipman had no dispute with LPL Financial Services, the BD with whom Good Life is affiliated as Good Life Financial Advisors — differentiated from its RIA, Good Life Advisors. The court denied that motion.

About $500,000 is in dispute, Miller says.

When Westburg and Lipman joined Good Life in July 2014 as hybrid advisors in San Diego, they had about $30 million in assets under management and approximately 230 clients.

The dispute’s core issue pivots on an operating agreement the parties signed two years after the FAs joined Good Life. The team had been receiving minimal profit-sharing distributions from the time they joined the firm. The operating agreement intended to formalize that aspect of the relationship, Miller says.

It included a non-compete clause stating that unless 120 days’ notice was given in the event the advisors decided to leave, Good Life was entitled to damages. The firm then told the FAs that to continue receiving distributions, they would have to sign the agreement, Miller says.

A non-solicitation contract wasn’t a requirement, Westburg and Lipman were told upon joining Good Life, according to Miller. But the two signed the operating agreement, with its non-compete clause, in order to retain their ownership stake in the firm, Miller says.

The advisors “left prematurely [Feb. 2, 2018, instead of March 17, 2018] and contrary to the terms of Good Life’s Operating Agreement,” argues Ward.

“This is a dispute between owners of the firm. It arises from Ms. Westburg’s and Ms. Lipman’s knowing breach of the agreement, which applies not to Good Life’s representatives but only to those who voluntarily decided to join in ownership of the firm,” Ward says.

He continues. “There were rules for the shareholders to follow, and Ms. Westburg and Ms. Lipman didn’t.”

When the FAs told the firm they decided to leave, Good Life informed them that any RIA to which they transitioned must pay Good Life more than $75,000 to acquire their business, Miller says, adding that this demand was made to compel the team to stay at Good Life.

The sisters took over their father Sam Lipman’s long-established advisory business when he retired in 2003. They had already been FAs in the Waddell & Reed-affiliated practice for about five years.

Good Life Companies, based in Reading, Pennsylvania, was founded in 2012 by Conor Delaney and Courtnie Nein, both former Waddell & Reed advisors.

Early this year, the Westburg-Lipman team signed on with Commonwealth Financial as independent advisors in La Mesa, California.

Meanwhile, their court case, yet to enter the discovery phase, proceeds.

Here are excerpts from our interview with George Miller:

THINKADVISOR: What do financial advisors Beth Westburg and Laurie Lipman allege in their lawsuit?

GEORGE MILLER: The basis for the claim is fraud. If you induce someone into a relationship by making either false statements or concealing facts that a reasonable person would want to know before entering the relationship, that’s fraud. Good Life told them: “Your business is your business, and you can maintain it.”

After more than three years with the firm, the advisors told Good Life’s CEO, Conor Delaney, that they weren’t happy and were leaving. Correct?

Yes. They said they were going to make a change and explore other opportunities. But Mr. Delaney said, “If you want to leave, then you’re going to have to find somebody to buy you out. If you go to another RIA, I’ll demand a payment because I’m going to lose revenue when you leave.”

What were the implications of his saying that?

Good Life had no right to demand such payment and try to hold our clients hostage at the firm. He was, essentially, demanding a ransom payment from another RIA.

To what extent have the advisors been financially harmed by leaving Good Life?

First and foremost, Good Life has improperly withheld their commissions and fees in excess of $100,000. On top of that, they withheld profit sharing that they’re due. On top of that, they haven’t reimbursed them for business expenses. And there are sources of damages that continue to grow the longer the case drags on.

On what basis did they join Good Life?

To entice advisors to join, Good Life brings them in as independent [FAs]. The cornerstone of the independent model is  that the client relationships “belong” to the advisors, not the firm. After Good Life advisors [join] the RIA, it offers them an ownership interest in the parent company, and they get to participate in profit sharing. That’s one of the big enticements to join the firm.

As advisors, what payout did Good Life offer Mses. Westburg and Lipman?

Good Life claimed their advisors get a higher payout and that they do not [have to] sign a non-compete [agreement].

What payout did Mses. Westburg and Lipman receive?

The reality was that after accounting for all the fees and charges at Good Life — technology access, ticket charges [etc.] — the payout wasn’t that much higher than what my clients had at Waddell & Reed. Certainly it wasn’t what Good Life represented it was going to be worth.

What else characterized the compensation they received?

The RIA took a significant cut of their revenue and fees they had generated, and spent a lot of that on high executive salaries, a lavish gym, an in-company bar. There was very, very little distributed in profit sharing. In addition, Good Life was supposed to give the team not only compliance and supervisory oversight but marketing and business development — those [two] services weren’t there.

When did the FAs start becoming unhappy with Good Life?

Fairly early in the relationship. But because they were some of the first advisors to join Good Life, they gave the firm a little leeway — perhaps more than they should have — in trying to remedy some of the deficiencies they noticed.

They could have just left, couldn’t they?

It’s very difficult to move a book of business from one firm to another. And doing so twice in a very short period of time is never advisable. So they did their best to stick it out.

After they were there for two years, they were presented with an operating agreement formalizing their ownership stake in the parent company. They were already receiving profit sharing distributions. Was anything in the agreement a surprise?

It included a non-compete clause. Good Life holds itself out to be an independent place where advisors can bring clients and grow their businesses — but then, in the operating agreement, it sort of sneaks in this non-compete-type language.

Yet your clients signed it. Why didn’t they say, “This isn’t what you told us when we joined”?

They recognized that that provision conflicted with everything Good Life had told them and asked Mr. Delaney [CEO], “What does this mean? You told us there were no non-competes.” They were then told that that section only prevents Good Life advisors from starting up another RIA to compete directly with them.

What’s your reaction to that explanation?

In the law, there’s a theory that if you convince somebody to sign an agreement by making misrepresentation, you can invalidate that portion of the agreement or the agreement as a whole.

What would have happened if the FAs hadn’t signed the operating agreement? They wouldn’t have received ownership interest in the parent LLC [any longer], which was one of the major draws to come into Good Life.

You say that Mr. Delaney tried to “hold [Westburg and Lipman] hostage.” Please explain.

Good Life was attempting to strong-arm my clients to stay at the firm so it could continue to collect its hefty percentage of their revenue.

What else did Mr. Delaney tell them?

Once they decided to leave, he began threatening to use the non-compete clause to demand payment from [a future] RIA firm. Good Life was also withholding over $100,000 in commissions and revenues that were due to be paid to my clients.

Seems they had a hard choice to make.

It was an untenable position. Mr. Delaney said, “You can leave — but now that I know you’re going to leave, I’m going to withhold your pay and sue you.” They were faced with leaving with the knowledge that they would likely be sued by Good Life.

The complaint says that he gave them an ultimatum: Quit or be fired. What if he had terminated them?

It would have been financially disastrous to the advisors and their future prospects, as we say in the complaint.

Why did they leave ultimately?

They left because they weren’t being paid. They were paying a lot of money — upwards of 30% of revenue — to be affiliated with this firm but not getting what they expected. Nor were they getting any significant profit sharing.

When did they leave?

Their forced departure was in February 2018.

Why was it “forced”?

If you’re not being paid and you have a hostile relationship with your immediate supervisor — Mr. Delaney was the Office of Supervisory Jurisdiction (OSJ) and, so to speak, their branch manager — who is threatening to go after you if you leave, the choice is pretty clear: You have no choice but to leave.

Had Mr. Delaney approached the team to split with their former broker-dealer, Waddell & Reed, and join Good Life?

They sent them a letter saying, “We’re former Waddell & Reed advisors and are growing an independent RIA firm. Come and move your practice to us and be independent and grow your business.”

Were the sisters eager to join?

They approached the whole concept of leaving Waddell & Reed and going to [any] firm with caution and great trepidation. But in joining Good Life, they were going to a firm that was run by people who used to be with Waddell & Reed. It seemed to be a solid firm, affiliated with LPL Financial, one of the largest broker-dealers in the country. On paper, it seemed like a promising move.

How are the two advisors doing now at Commonwealth?

They’re in the rebuilding phase and working hard to recover.

Do they regret leaving Waddell to join Good Life?

I think they would have gone truly independent regardless. But they certainly have regrets that they joined Good Life.

They’d been affiliated with Waddell as independent contractors for more than 16 years, starting when they joined their father’s practice. Why did they want to change?

They were seeking true independence, a platform where they could own and grow their business, and offer unlimited investment opportunities to their clients.

Is that what they envisioned when they decided to join Good Life?

That’s what they thought they were getting with the Good Life [Companies]. But it turns out the Good Life wasn’t so sweet.

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