It is an all too common situation: an investment adviser representative (“IAR”) is hired as an independent contractor or employee of an adviser firm, inherits and/or builds business over time utilizing the firm’s valuable resources and trade secrets, and then leaves the firm for another opportunity bringing all the clients, and perhaps even firm resources, along with him/her. A battle ensues: the IAR thinks he/she is the rightful owner of the clients and has every right to solicit them to open accounts at his/her new firm and the prior firm, in turn, argues that the clients are clients of the firm, not the IAR. The result is often a costly legal fight, a distressing loss in revenue, the spoliation of trade secrets, and quite the headache.

But, perhaps it does not have to happen this way. How can firms protect assets, client lists, and other trade secrets from poaching IARs?

Tip 1: Come to an understanding with your new recruit early.

Ask questions. What was the IAR’s prior agreement with his/her previous firm? What are his/her intentions with regard to growing the firm’s book of business? If you part ways, amicably or not, who gets first right of refusal over the existing clients? What about new clients? Ultimately, the firm may have to make business decisions specific to the recruit. For example, if an IAR wants to “own” his/her clients, perhaps the answer is not always “no.” Perhaps a modified compensation structure could reflect the risk to the firm of the IAR’s potential departure. Maybe the firm and IAR can treat clients who come with the IAR to the firm differently from those that are onboarded while at the firm. The important thing is that the firm and new recruit are clear on their arrangement, as awkward as the conversation can be.

Tip 2: Contract the right way.

Memorialize the firm’s understanding with the IAR in a written agreement with an eye toward protecting the firm should the relationship ultimately take a different path. A “form” or “stock” agreement from the internet, prior employment, a consultant, or even a law firm may not protect your firm’s assets as it should. Often times these agreements can be contradictory, not tailored to the particular situation at hand, unclear, or even missing important industry-specific provisions. Spending the money now to put your firm in the best position possible will ultimately save the firm time, effort, and expense on the back end.

Tip 3: Make sure the contract is legally binding.

You may be asking yourself – don’t all agreements signed by two parties hold up in court (or arbitration)? The answer is far too often “no.” Different states interpret certain terms in the agreement differently. Where one state may prohibit a term of a contract, another state may not. That is why it is so important to not only choose a jurisdiction where your contract is legally binding, but also a jurisdiction with legal precedent most favorable to the firm.

Tip 4: Consider how your firm should handle adverse situations before they happen.

Even if the firm has the most favorable contract possible, which will significantly decrease litigation risk, disputes may still arise. Determine what the firm’s approach will be when faced with potential litigation. Budget accordingly. Consider how the firm would pay for litigation and who it would consult should a need arise. Sometimes, a lapse in time while the firm gets organized can be detrimental to the strategy. A delay can result in all client accounts being transferred elsewhere before the firm can act and a race to the courthouse ensues. With careful planning, such urgency and panic can certainly be mitigated.

Tip 5: Consider contracting for litigation before it becomes a reality.

Take your plan and apply it to the contract. Does the firm prefer the dynamics of the state or federal court system or does it prefer the more amicable approach to arbitration or mediation? Is reputational risk a concern for the firm? Does the firm have the ability to get an emergent court order to stop wrongful conduct? The contract should set expectations for how the parties intend resolve legal disputes.

While this is certainly not an exhaustive list of tips, it covers some of the more important issues commonly seen in disputes between IARs and their former firms. Firms tend to focus on the business aspects of onboarding IARs quickly without considering potential ramifications down the road. Sometimes that leads to quick conversations, poor contracting, and a scramble once a dispute arises. Advisers should concentrate on protecting and retaining these IARs and the clients they service as part of their long-term business model.

For more information on Bressler, Amery & Ross’ Investment Advisers and Labor & Employment Law practice groups, please visit our website at or contact the authors.

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