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Bust a Move...Cleanly

Going indie with your book without going to court

Candace Bahr and her husband and business partner, John Baranowski, had spent 18 years at wirehouses and often thought about going independent. Finally, in the late 1990s they were ready. The day after their four-year contract with PaineWebber expired, they announced their resignation.

Bahr and Baranowski had planned their move with care. They did nothing that could be construed as damaging to PaineWebber and made sure they were carrying out all their duties to the firm until the contract expired. They were absolutely scrupulous about not soliciting current clients.

So the transition went extremely smoothly as they packed up and prepared to set up shop in another part of Carlsbad, Calif. Even so, Bahr says, they didn't get away clean. At the last moment, they were presented with a bill for something between $300 and $500 — she no longer recalls the exact amount — that the company said it was owed.

After all those years of service, Bahr was irked by what she viewed as niggling, but quickly wrote a check and moved on. “If that's what it took to make them happy, that was fine with us,” Bahr says.

The Bahr/Baranowskis are living proof of the rewards that many reps find in going independent — and a reminder that even the most carefully laid exit plan from a wirehouse or big regional brokerage can hit a snag. Many a rep has learned that the process of leaving can turn into a long, painful, litigious and even terrifying ordeal.

“Some firms can really swing a big stick if they don't want you to go, so you've got to navigate, avoiding that big stick,” says the head of one independent advisor's transition team, who asked that his name not be printed.

Firms have good reason to fight: They know that clients have more affinity for their reps than for the name on the door. Most clients — 85 percent to 95 percent — follow when their rep leave (Merrill Lynch has a reputation for retaining a good chunk of a departing rep's clients).

When handling departing reps, some wirehouse firms “use a strategy that is designed to both retain clients and, frankly, scare other advisors into not leaving,” says Bill Van Law, national director of business development for Raymond James. Horror stories circulate among wirehouse reps, like one shared by the indie transition team head, in which a California-based rep decided to leave his wirehouse a few years ago but did so clumsily, losing more than 50 percent of his clients when his firm aggressively went after his book.

From the moment you decide to leave the wirehouse, every move you make needs to be right. Transition teams at some of the largest independent advisory firms, from Schwab Institutional to Commonwealth Advisors, have spent years trying to make the process as smooth as possible and to help their reps avoid the most common mistakes. But it ultimately comes down to the individual FA, thinking smart and acting appropriately.

“For people coming from the wirehouse world, it's often a tricky extrication — you really have to want it,” says Andrew Daniels, director of field development for Commonwealth. Here are some of the steps you need to take to make a good transition without losing clients or spending costly time in court.

Hire a Lawyer

Before you do anything, before telling your current employer you're leaving, get a lawyer. You will need legal assistance to fully examine your current contract. It's essential to figure out whether you have any restrictive covenant provisions with the wirehouse, such as being barred from contacting clients for a certain period of time, or, worse, barred from taking any action that would be considered direct competition with your former employer. The latter clause, in the hands of an aggressive wirehouse, could really make setting up your business a trial.

Many reps believe that simply going over the contract themselves is enough, but, because advisors rarely have legal expertise, they are setting themselves up for an unpleasant surprise, says Thomas Giachetti, head of the securities practice group at Stark & Stark, who also serves as outside counsel for Schwab. Advisors “need to be cognizant that if they have a contract and break its terms, their employer will have the legal right to seek recompense in a court of law,” he says.

Don't even think about breaking the contract, unless you want to guarantee a court visit. “If you sign a contract you have to live by its rules,” Bahr says. “If you leave prior to the expiration of that contract, be prepared — you will probably owe the company a substantial amount of money, and they are probably going to treat you much differently than if you had met all the obligations you had.”

While many independent advisors recommend getting the groundwork started on going independent while still at the wirehouse, whether it is studying for a securities license, contracting with technology providers or working with real estate agents to find office space, Giachetti warns that such activity cannot happen on the company's time, or you may find yourself having to defend your actions in court.

Play Politics

Once a rep announces he is departing, there is a common mistake that can easily be avoided — don't act like a teenager.

“If you don't thumb your nose at the firm you're leaving, departing is far less strenuous [today] than it was maybe five years ago. But you really have to cross your ‘T's and dot your ‘I's,” says Commonwealth's Daniels.

It's only human to want to slack off once you give notice. You also might dream of telling off that boss who has been driving you crazy for years. Don't do it. Even the mildest comment could bring the house down; all it takes is one irate office manager to upset your entire transition process, because wirehouses often rely on their ground-level supervisors for input as how to handle a departing rep. If a rep aggravates his superior, that's a recipe for trouble.

“Your first line of defense is having a good relationship with the manager in the office you are leaving,” Bahr says. “If you antagonize that person, there is a much higher probability of the company trying to put a restraining order on you.” In her case, Bahr got lucky. When the manager of her PaineWebber office asked where she was going and she replied she was affiliating with LPL, he asked, “What's LPL?” Bahr took it as a sign he didn't think she was making a wise or profitable move and was less likely to try to hinder it.

A common sticking point in exit negotiations is deferred compensation — retirement and bonus plans. It's a big decision for reps, especially those who have been ensconced in wirehouses for years and have come to depend on perks like annual bonuses. In some cases, contracts specifically prohibit reps from collecting perks like deferred comp in the event they depart, but there is also a general belief among independent advisors that if you try too hard to collect, you're pushing your luck.

Independent transition firms generally advise that if the amount owed is relatively small, it's not worth battling your former employer for it. Doing so could drag you into serious litigation, distract you from the critical task of starting your business and ultimately cost you more than the amount in question. Bahr and Baranowski, for example, abandoned about $65,000 in deferred comp and have no regrets about doing so. “If you're only looking at the short term, you're probably never going to make the move to go independent,” she says.

Keep Your Best Clients — the Safe Way

Perhaps the most delicate — and potentially explosive — matter for a departing rep is retaining clients. Independent advisors are of two minds when it comes to the best time to contact clients. Some argue that simply sending a notification to clients that you are leaving does not constitute soliciting them, while others argue that reps need to keep their mouths shut completely.

One thing needs to be clear: You cannot take any formal records of your client relationships, nor can you solicit for the business of existing clients in any way while you are walking out the wirehouse door. So even dropping the news of your departure in conversation with a client or in an informal email is a risky bet.

While a rep is silently preparing to depart from the wirehouse, he should take the time to go through all of his clients and use the opportunity to winnow them down to the most lucrative and strongest relationships. “When advisors are going into the transition, they should decide whether each client would consider themselves foremost a client of the advisor or of the advisor's firm, says Schwab's Furey. If the client regards themselves as being foremost a client of the particular rep, “Advisors are going to have a very successful transition and will retain many of those clients.”

What helps advisors going independent today is the emergence of a more sophisticated investor base. Clients will not blindly accept a replacement rep offered by their brokerage, and who will go out and search for their old rep, wherever he winds up. A simple change-of-address card mailed to clients at the appropriate time or a regularly updated Web site is often all it takes to keep clients. “The tightest client relationships will move the fastest and those are generally the most revenue generating,” Furey adds.

One last-ditch option, against which many independent firms advise, is for a rep to “buy his book” — in effect, to pay the former firm for access to all or some of the clients. Such a move is rare, and it's something firms like Commonwealth shy away from. “None of the independents are, to my knowledge, in the business of buying anybody's book,” Daniels says. “That helps us in terms of the legal aspects of things, because I'm not out there enticing anyone to come to Commonwealth for anything other than the culture and technology that we offer.”

And, if despite having done all you could, you still get hit with legal action by your former wirehouse, it's not the end of the world. About 2 percent to 5 percent of departing reps each year get sued. If you are one, get good counsel, be ready to compromise and have faith in your new business. “Whether or not there's any legal action, in the long run it probably doesn't hurt the FA that much,” Van Law says. “If they have had good relationships with their clients, they're going to move their book regardless.”

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