Every Man For Himself: Protecting Yourself In A Team Breakup

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Over the past decade, the financial services industry has moved increasingly to a team-based model—whether as a matter of choice, as a first step in a succession plan, or because your wirehouse has forced a shotgun marriage. But just like any marriage, things don’t always work out and smart advisors plan ahead to make sure they’re protected in the breakup. The last thing you want is having your practice stripped away from you by a greedy partner or firm—which happens more often than you might think. Along those lines, here is my list of top five steps advisors can take to make sure they don’t get left holding the short straw when their teams implode, whether you’re just joining a team, or part of one that’s been together for years:

  1. Don’t just use your firm’s standard agreement

If your broker/dealer has a standard partnership/teaming agreement, it’s probably not a bad place to start. It likely gives you a basic framework for how your group is going to work, but remember that it is written by your firm, and therefore is geared with the firm’s interests in preserving business in mind. For example, many firm-generated standard teaming agreements give the branch or regional complex manager final authority over dividing client accounts in the event of a team breakup. Think about your own situation for a minute: do you want your branch manager deciding what accounts you get if your team dissolves?

  1. Make sure your team agreement spells out how it will run

The seeds of many partnership breakups are there right from the start, with a poorly written team agreement. So if you’re not just going to use your firm’s standard agreement, here are some matters you’ll want to ensure are addressed in your team agreement to make it more likely your team can stay together for better or for worse:

  • Spelling out each team member’s roles and functions on the team, but allowing room for junior members to grow and add responsibility;
  • Explicit formulas for how compensation is to be calculated and divided among team members. This includes determining relative values for client origination and for being the primary client-facing service person;
  • Creating a compensation structure that incentivizes junior team members to generate more business;
  • Establishing clear internal governance procedures regarding authority and decision-making in the group;
  • Creating procedures for removing non-performing members that are objective, fair and cannot be abused;
  • What happens if a team member dies or is permanently incapacitated? How will responsibility for servicing their clients be divided? What about the revenue from those clients? Will surviving spouses be entitled to a share of the ongoing revenue? Does the surviving spouse get paid for relinquishing your former partner’s interest in the business?
  1. Be as specific as possible in describing division of accounts in the event of a breakup

Like any good prenup, the devil’s in the details. While every team’s operations are different and requires attention to nuance that addresses the differing levels of seniority and business each team member brings to the table, at a minimum here are some of the subjects you and your partners should make sure are addressed when you are creating—or amending—your team agreement:

  • Create an easy to use test for determining whose clients are whose in the event of a breakup. Is everyone on the team free to solicit all clients? Are there to be “spheres of influence” among team members based on origination, primary oversight or some other criteria? How are will the team handle clients who are genuinely shared between two advisors?
  • Establish very specific procedures for how the team will notify all clients in the event of a breakup. Will there be a joint communique to all clients? Does each advisor get to notify their specific clients? How will the language in the client communications be agreed upon?
  • Institute strict confidentiality and nondisclosure provisions. Nobody wins if you are all telling clients how much your former partners made, or what terrible people they were behind the scenes. Clients don’t want to be part of your drama, and you all lose if you drag them into it.
  • How will disputes over client “ownership” be handled? Consider instituting a “draft pick” clause where advisors will get to choose among disputed client relationships and avoid ugly public fights.
  • What happens with non-licensed staff on the team? Are all partners free to try to recruit their favorite staff members, or are there restrictions on trying to poach each other’s support personnel?
  • What are the financial penalties for violating the team agreement?
  1. Don’t just lump everything into a joint rep number of one of the advisors

I have handled several disputes involving the breakup of a team where the entire client base was lumped under the rep code for the senior advisor of the team. This is a bad idea, even if you’re the senior member of the team. Why? Because the rep code to which clients are assigned is not determinative of “ownership” anyway—so why do it? It is simply a distraction that creates additional friction among team members and doesn’t settle disputes. For example, I am presently handling litigation over the breakup of a $400 million + practice where all the clients were assigned to one member of the practice, even though the other members contributed greatly to bringing in both clients and assets. Under those circumstances, no judge or arbitration Panel is reasonably going to say that the practice member whose rep code was used for all clients somehow “owns” the entire client base. A much better idea is to create a new code for the practice. It acknowledges the reality of the situation: everyone in the group contributed to the practice’s success, and is entitled to their fair share of the communal property.

  1. Consider the role of the Protocol in determining client division

The Protocol for Broker Recruiting has specific procedures for dealing with team breakups. If there is a written team agreement that addresses the division of clients, then those provisions will control. But if your team has failed to heed this advice and either does not have a written agreement—or one that does not address division of clients when the practice dissolves—then certain default procedures kick in. Specifically, if the entire team has been together for four years or more, then every team member is free to go after and solicit the entire client base of the practice if it breaks up. But if the team has been together for fewer than four years, then the team members may only solicit those clients whom they brought with them into the partnership.

But of course your team may not be associated with a Protocol Firm, or even if it is, perhaps some of your team members will move their practice to non-Protocol firms. What happens then? Will the terms of the Protocol govern or those of your specific team agreement? These are the kinds of issues that experienced legal counsel can help you and your teammates consider, and then implement in your agreement.

Scott Matasar, Esq. is a founding Member at Matasar Jacobs LLC in Cleveland, Ohio.  His legal practice is focused on representing firms and individuals in the securities brokerage industry.  Among other things, he regularly defends clients in FINRA arbitration cases, represents advisors under investigation by state and federal regulators, and counsels both firms and advisors on a wide range of regulatory and operational issues, including transition matters.  He can be reached at [email protected], or at 216.453.8181.

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