Edelman Financial Engines is facing a set of lawsuits from former advisors trying to break free of what they deem “unenforceable” covenants restricting their activities after departing the firm.
But Edelman disputed this in a response to one of the lawsuits, accusing the advisor of “flagrant breaches of contract.”
Former Edelman advisors Jennifer Staben and Tim Dowden filed their complaints in California and Texas state courts, respectively. Dowden’s complaint argued that the non-solicitation and confidentiality contract he signed when working at Edelman is now being used “to discourage him and other employees from seeking employment elsewhere.”
Staben’s complaint, filed earlier this month in the Superior Court of California, detailed how she joined Edelman in 2018 and quickly signed an agreement with confidentiality and non-solicitation restrictions. After joining, Staben helped the firm hire a full-time customer service associate to assist her in building a book of business.
In April 2023, Edelman instituted a policy in which advisors with less than $100 million in managed assets needed to use a “CSA Pool” of associates not partnered full-time with particular advisors.
According to the complaint, Staben said the change led to a decline in customer service, and her work suffered, with Edelman clawing back compensation in 2023. She decided to leave Edelman, resigning on Feb. 16, 2024.
But Edelman informed her that most stipulations in the covenants were still enforceable, leaving Staben (and others in similar situations) in a “dilemma,” according to the complaint.
“They can either comply with overly broad and unlawful restrictive covenants to avoid being sued but, in doing so, risk violating the fiduciary duty they owe to their clients, or seek to challenge the overly broad restrictive covenants at risk of being sued so as to fully honor the fiduciary duty they owe to their clients.”
Dowden faced such a dilemma when opting to leave Edelman, according to his suit filed in Texas District Court on Jan. 12.
After Dowden joined Edelman in December 2019, he also signed an employee agreement, according to the complaint. While Dowden claims Edelman promised him about 50% of primary leads in the Dallas area, the flow of leads trickled to 20% “without notice or justification,” affecting Dowden’s compensation, bonuses and stock revenue.
Dowden, who managed $154 million for 280 clients at Edelman, said he felt “trapped” in this situation, arguing the perceived scope of the covenants hemmed him in. According to Edelman’s reading of the contract, Dowden was restrained from engaging clients he provided services to, and those he was “even provided information about” in the previous two years, according to the suit.
In the complaint, Dowden noted that the agreements restricted him from communicating with clients to tell them about his departure during the four-week resignation notice period nor announcing his departure “on public platforms.” To Dowden, this ran against the CFP Board’s Code of Ethics (Dowden held a CFP certificate).
Notably, he cited the CFP’s mandate that certificate holders have an obligation to provide clients with “any information that is a material change” or that may sway a client to continue doing business with that advisor or their firm. The advisor believed his resignation from Edelman easily qualified as being material.
“As a financial advisor, Mr. Dowden has an independent duty to his clients as their fiduciary to notify them of information material to the advisory relationship, particularly the announcement of his resignation from (Edelman) and his change of employment,” the complaint read.
The CFP Board declined to comment “about pending litigation.” When asked whether the board considered covenants restricting advisors from contacting clients for some time in conflict with CFP Code of Ethics mandates, irrespective of this case, the board again declined to comment.
Both Dowden and Staben have found new work with the same firm, Prime Capital Investment Advisors, according to SEC filings indicated on their IAPD profiles. Both advisors are already featured on Prime Capital’s listing of advisors on its website.
Staben is being represented in court by Michael Seitz, while Dowden is being represented by Mavish Bana and Scott Seifert. The three attorneys work at Spencer Fane, a Kansas City-based law firm that often provides legal services for Prime Capital.
Attorneys for Staben and Dowden did not respond to requests for comment prior to publication, nor did representatives for Prime Capital Investment Advisors.
The dual suits detailed Edelman’s alleged tactics at play when an advisor leaves, including instantly shutting off all phone and email addresses to prevent them from communicating with clients. Staben also accused Edelman of not telling former clients where she had gone to work, even if the firm knew and the clients asked (Dowden echoed this in his complaint).
To Dowden, these alleged “draconian employment agreements” resulted from a period of intense mergers and acquisitions funded by numerous private equity over several years. Dowden believed these infusions of PE cash left Edelman’s executives fixated on growing the firm’s assets under management “at all costs,” according to the complaint.
“As part of achieving that goal, the executives at Edelman Financial Engines are incentivized to ensure, by all means necessary, that the clients serviced by a departing financial advisor do not follow their preferred advisor to a different firm,” the complaint read.
Edelman declined to comment but said it would continue to “defend against the claims in these lawsuits.”
That defense is illustrated in more detail in a response Edelman filed against Dowden’s allegations last Friday. In the counterclaim, Edelman accused Dowden of “flagrant breaches of contract.”
According to Edelman, Dowden started working for Prime Capital before tendering his resignation to Edelman. Dowden allegedly recreated a list of Edelman clients he’d previously serviced “on behalf of, or to the benefit of” his new employers at Prime Capital, and in doing so, broke the covenants he’d agreed to at Edelman.
“This information identifying individuals as having significant assets to invest and the ability to make future investments is not publicly available and constitutes one of (Edelman’s) most valuable trade secrets,” the counterclaim read. “(Dowden) used and disclosed this information to Prime Capital without permission and in violation of the agreements.”
Both Staben and Dowden argue Edelman will pursue former advisors in court to ensure the covenants are adhered to, a process currently playing out in a recent legal tug-of-war between the firm and Mariner Wealth Advisors.
Edelman accused the RIA of encouraging advisors to break their non-solicitation and confidentiality agreements after moving to Mariner, claiming the firm was engaged in a “calculated campaign” to steal Edelman’s business. Mariner countered by accusing Edelman of using the courts in a multi-year effort to stifle fair competition within the industry. Edelman is also in arbitration with several advisors who left the firm for Mariner.
But Edelman’s not the only firm dealing with former advisors seeking to break what they deem unfair covenants. Hightower is being sued in California federal court by Darren Reinig, a former advisor who claims the restrictions in his contract make continuing in the wealth management space untenable.
Reinig claims he was the founding partner of Delphi Private Advisors, which Hightower acquired in 2019 and merged with another California-based firm. But several years later, he opted to leave and this month registered a new RIA with the Securities and Exchange Commission. Like Staben and Dowden, Reinig signed a contract including confidentiality, non-compete and non-solicitation mandates when he began work at Hightower.
Reinig claimed the agreement bound him from starting any business that “Hightower (or any Hightower affiliate) may be engaged in or may engage in the indeterminate future.”
According to Reinig, Hightower argued that he’s not allowed to contact any “Hightower client,” which could extend to as many as 138 different businesses in 34 states (as well as those businesses' vendors, employees and contractors).
“Hightower’s position limits the ability of prospective clients to do business with individuals of their choice and makes it impossible for Reinig and/or third parties to discern if, who, when, with whom and whether they might engage in conduct without running afoul of Hightower’s purported contractual restrictions,” the complaint read.
Hightower declined to comment, citing a policy not to discuss pending litigation.
Despite these cases, Brian Hamburger, the CEO of MarkerCounsel and Hamburger Law Firm, said his practice wasn’t tracking any increase in these types of cases compared with the past, and felt there were many aspects of an advisor's relationship with their former firm that would need to be considered before moving to litigation. Max Schatzow, a partner with RIA Lawyers, told WealthManagement.com that anecdotally he'd seen an uptick in these types of claims, and suspected it was mostly due to the growth in the space.
"There are so many more aggregators and large RIAs today than there were years ago," he said. "These businesses have more executives and employees subject to non-competes and non-solicits. I think most wirehouses and their employees are subject to mandatory arbitration before FINRA to resolve these types of claims."