Don't Be Stupid!

A large number of National Association of Investment Professionals (NAIP) members request advice on whether to sign employment contracts. To my surprise, many never consult an attorney. And shockingly, some brokers never thoroughly read these agreements before signing them. The following are two excerpts from an agreement a large independent dealer has gotten many financial advisers to sign: Non-solicitation

A large number of National Association of Investment Professionals (NAIP) members request advice on whether to sign employment contracts. To my surprise, many never consult an attorney. And shockingly, some brokers never thoroughly read these agreements before signing them.

The following are two excerpts from an agreement a large independent dealer has gotten many financial advisers to sign:

Non-solicitation

(b) FA (financial adviser) shall not solicit or do business with a client of the Associate (branch manager) or any Company X client without prior approval of such Associate or an officer of Company X. This restriction is effective during the term of this Agreement and for a period of three (3) years thereafter.

Folks, a broker might as well kiss his business goodbye if he can't solicit his own clients for three years after changing firms.

But wait, there's more!

Indemnification

(a) The FA indemnifies (to secure against loss) Company X, its parent company, its Associates, successors and assigns, clearing firms and affiliates, and all of their respective officers, directors, employees, agents and stockholders from and against:

  1. all liabilities of any nature of FA, his/her employees, agents, customers or other, whether accrued, absolute, contingent or otherwise existing as of the date of this Agreement.

  2. all liabilities and costs arising out of the conduct of the FA's business activity, including but not limited to any action, inaction, misrepresentation, omission, conduct, misconduct, unsecured debit, etc.

In other words, a broker who signs this agreement would be responsible for any mistake made in the process of serving a client, while the broker/dealer would have no responsibility. Does this sound reasonable to you?

And finally, any unfortunate rep who signs this one-sided agreement can expect to be hit with an injunction temporarily restraining the rep from doing business “in the event of breach,” or even a “threatened breach,” of any provision of the agreement. Furthermore, the agreement states that the company shall be entitled to an injunction restraining such breach “without showing or proving the actual damage sustained or about to be sustained.”

In this agreement, the manager or broker/dealer can terminate the relationship without cause at anytime. Further, they can prevent a broker's clients from moving assets to the rep's new employer without even proving actual damages.

If a rep decides to fight the agreement after it is signed, he or she will have an uphill battle because it must be done in NASD arbitration in the city where the broker/dealer is based. No doubt the firm greatly influences the arbitration pool in this city, thereby minimizing the chances of overturning the agreement.

Anyone who signs an agreement like this is stupid! Don't be stupid. Consult an attorney. Better yet, ask the NAIP for assistance. We are creating a new for-profit agency to help brokers negotiate employment contracts. You must be in the $1 million production range for assistance due to the cost.

If you aren't a million-dollar producer, e-mail me at [email protected] to request a copy of my book “Broker Beware: How to Protect and Grow Your Business in the Financial Services Industry.” Scheduled for release in February, the book will give you advice on how to negotiate a contract that's fair for both parties.

T. Sheridan O'Keefe is a registered rep based in Minneapolis, and president of the National Association of Investment Professionals, a trade group for brokers and advisers. The NAIP can be reached at 952/322-6247. He can be contacted at [email protected].

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