Registered Representative’s Corner: Things to Consider Before Transitioning to a New Firm

By: Erwin J. Shustak, Managing Partner       

During 47 years of experience representing registered representatives through thousands of transitions from one firm to another, and after arbitrating countless hundreds of transition disputes, before the courts and FINRA, there are common reasons why transitions go sideways, embroiling the transitioning individual broker, or team, in an expensive, time-consuming legal dispute rather than focusing on moving over clients and building assets under management.

These are the points to consider when thinking about a transition. Each of these issues should be explored, in detail, with your professional “team”. The “team” must include (i) an experienced, independent recruiter, very familiar with the securities/financial services world with a proven record and extensive industry contacts who can offer various options including major wire houses; independent platforms; RIA firms; and hybrid situations, and advise on up-front “forgivable notes” and other incentives for making a move; (ii) an experienced and knowledgeable attorney specializing in all aspects of the financial services/securities world, familiar with everything ranging from “Broker Protocol” issues; trade secrets; forgivable “upfront” notes; the laws of your specific jurisdiction (California competition and trade secret laws are completely different, for example, from New York and other states); and, hopefully, a seasoned practitioner who has been “around the block” many times in helping many brokers and groups navigate a transition; and, finally, (iii) a good accountant or tax advisor who can help with tax advice and entity formatin issues.

And the “team” must be in place before you begin your search for a new firm. Often, we have clients come to us a few days before they are about to start at their new firm, having received advice from a lawyer supplied by the firm they are about to join, who may have spent about an hour or so going over some basic legal issues. Typically, however, aside from the potential for a conflict of interest in receiving advice from an attorney hired and paid for by the new firm, often the advice is given by an attorney in an entirely different state than your home state. You must be certain the attorney whose advice you are relying on is both independent and serves only you, not the firm paying their bills and sending a steady client flow. Your attorney must be licensed, and practice, in your specific jurisdiction. That is a paramount consideration. If your foot hurts, you would not consult an ear specialist. Same with lawyers. If you live in California, and are considering transitioning to a New York based firm, you need an attorney very familiar with California, as well as New York law, not an attorney who practices in, for example, Colorado. Nor should you retain your wife’s hairdresser’s best friend or someone who does mostly house closings. This is a very detailed and specialized area of the law and be sure you don’t hire someone looking to learn a new area on your dime. About 1/3 of the transition clients who come to our firm mistakenly hired the wrong attorney at the outset. Make sure the attorney and firm you retain does this kind of work, day in, and day out. Do your homework!

One your team is assembled, we recommend these stops and considerations before any interviews, offers, serious discussions, or sharing your plans with anyone outside your team occurs:

1. Gather Your Documents: One of the most common problems we see involves brokers ready to make a change, but who have not gathered the various contracts, deferred compensation plans, non-solicitation agreements, and other documents they signed over the years with their current firm. Having those documents ready for your attorney to review is critical! No lawyer can provide advice without seeing all the agreements, as no doctor can diagnose a knee problem without X-rays, CAT scans, and so on.

In a recent case, the clients gave us what they thought was the universe of agreements signed with the firm they were leaving, but, unfortunately, they forgot they had signed another agreement that contained a mandatory arbitration clause within it which was part of the HR package they signed when they joined the firm years before. We didn’t learn of that agreement until after we filed a preemptive suit in federal court which, of course, we had to withdraw once the former firm produced a copy of an employment agreement containing a mandatory arbitration clause. 

Ask your current firm’s HR department for copies of all employment, all deferred compensation and similar benefit plan documents; and everything you signed with the company. If asked why you want them, it would be normal to explain you are working on your estate matters and the estate attorney asked to review all contracts as part of the estate plan. That is nothing unusual.

2. Keep Your Cards Close to Your Vest: The saying that “loose lips sink ships” equally applies to transitions.  Keep your plans to yourself. The less people you discuss this with, the less likely it is word will get back to your current firm who may terminate you on the spot and really put a dent in your transition plans. And before you discuss your move with co-workers who you may have an interest in bringing with you as part of your team, be sure you have had your attorney review all agreements. Many firms have new hires sign non-solicitation clauses that prevent a departing employee from soliciting others to leave with him or her. There are legal ways to do this, but first obtain advice and guidance from counsel before asking someone, no matter how close you believe you are, to jump ship on the new adventure with you.

3. Plan Your Move Carefully: Many of the larger, “wire house” format firms are, more or less, the same. You operate under the firm’s name and reputation; you are a W-2 employee; lots of layers of management above you; not much control over your day-to-day life; a very proscribed way of doing things; and, typically, payouts in the range of 35-40%. It works for many, but not all. Those with an entrepreneurial bent often choose to go the independent route. Yes, you may be doing a lot more management, HR, payroll, and a lot of details that were taken care of my others at your wire house, but the payouts can be much higher; you may be able to earn more money on the same book of business; there are substantial tax and other benefits of owning your own business (pensions, medical expense reimbursement plans, and so on, not available to W-2 employees). And, most importantly, you get a chance to create your own “brand” and name and create an asset you can grow and sell down the road when the time is right for your exit strategy.

In the past decade or so, many of our clients have opted to go independent and join, or form, their own RIA (registered investment advisory) firm and operate under the umbrella of a hybrid RIA/Broker-Dealer, but with their own, unique firm name and branding. That allows you to build a successful business and brand and offers more opportunities to bring in partners or associates, and build equity that, hopefully, you can cash out with by selling or merging your independent, branded firm with another, possibly larger firm when the time is right. Like all tradeoffs in life, there are pros, and cons, to operating your own business. Ask yourself if you value the flexibility of being truly independent and can hire others to handle the more mundane but necessary administrative tasks.

Every transition is complicated. You want to make your transition one that you have thought out and, hopefully, will be your last transition. Advisors who have gone through multiple transitions inevitably lose clients—by design or other reasons— and AUM (assets under management) not to mention the stress that comes with each transition.

Shustak Reynolds & Partners, P.C. has successfully guided thousands of financial professionals, investment advisors, and registered representatives through successful transitions,and we have successfully resolved botched transitions that went sideways before the transitioning advisors came to us.
Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.





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