Q80 – Can I Take My Employees With Me If I Transition To The RIA Model?

Also available as podcast (Episode #80)

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Can I Take My Employees With Me If I Transition To The RIA Model?

It is common for financial advisors transitioning their practice to the Registered Investment Advisor (“RIA”) model to want to bring some of their existing support team members along with them.  These team members are often not only critical to the advisor’s practice in general, but will likely also play a key role in the transition process itself.  The issue then arises as to whether it is possible to bring such employees with you, and how to safely navigate the process of doing so.  If done correctly, it is generally feasible.  There are nonetheless best practices, and potential legal considerations to be mindful of.

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Full Transcript:

Brad: Can I take my employees with me if I transition to the RIA model? That is today’s question on the Transition To RIA Question and Answer series, it is episode #80.

Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition to the RIA model.

If you’re not already there, head to TransitionToRIA.com, where you can find all the resources I make available. I include this entire series in video format, audio format, I have articles, I’ve whitepapers. All kinds of resources to help you better understand the RIA model. Again, TransitionToRIA.com.

With that, I’m excited to have my first repeat guest on the series. For those of you watching in video format, you can see, Rich Chen has once again joined us. Rich, nice to see you again.

Rich: Thanks so much for having me again, Brad. It’s so great to be here.

Brad: Absolutely!

The topic we’re going to talk about today is if you were to leave your current firm – which could be a wirehouse firm, an independent broker-dealer firm; there are some nuances there, depending on where you’re coming from – can you take your employees, your team members with you on your path into your new practice?

That’s what we’re talking about here today with Rich.

I will preface this conversation – and I’m sure Rich will as well, as he is an attorney – we are going to be discussing some legal angles to this. However, as with all legal situations, the devil is in the details. We’re going to be talking at a very high level on this topic. But because every advisor team situation is unique, none of this should be construed as formal legal advice. You would need to follow up with Rich for a one-on-one conversation about your specific circumstances.

It’s nonetheless valuable for us to be having this conversation, even at a high level, so you generally know how this sort of thing works. But again, it’s not specific legal advice. That would require a one-on-one conversation.

Before we start diving into this….Rich, for those that don’t know you already, if you could give a little background on yourself, that would be great.

Rich: I’m Rich Chen, I run my own law firm practice, Richard L. Chen PLLC. We focus on providing advice on regulatory, corporate, employment matters for investment advisory firms and those transitioning to advisory firms as well.

We help folks with launching their own RIA, mergers and acquisitions, fund formation, employment issues, drafting agreements and commercial agreements as well. On the regulatory side, we help folks with advisor registration with the SEC and states as well as development and if they want management of their compliance programs, as well as representation in SEC examinations. We also conduct mock audits for those who want that.

Brad: Quite the wide variety. For those that don’t follow Rich on LinkedIn, you should. He puts out a lot of great content. It’s easy for him to have just said that list of things and say he does it. But if you see his content, you will know he’s a wealth of knowledge on the areas he just described. I encourage you to find him on LinkedIn and follow along.

As I mentioned, Rich is the first repeat guest I’ve had on the series. The prior episode he did with me was episode #52. For those that want to take a look, we discussed how to structure the legal ownership of an RIA. A lot of great information there as well. Again, episode #52 if you want to check that out.

This is now episode #80, so it’s nice to have you back again, Rich.

As we jump in, let’s level set by starting with a high level of some of the different topics that advisors should be aware of if they’re looking to move, particularly out of a captive environment, into the independent space.

The employee situation we’ll be talking about today is one of them, but maybe you can start by naming some of the topics advisors should be aware of in general.

Rich: Absolutely. So there are three general buckets of things to think about when you’re thinking of making a transition.

The first one is, with respect to, what clients can I take with me? Can I compete with my current firm? That is something that can oftentimes be seen in the agreements that an advisor has with their employer.

There are a number of situations where you can take that information if your firm is part of the broker protocol, and the firm you’re leaving to has joined the protocol as well, as long as certain conditions are met. But that’s a broader topic, which Brad has covered in previous episodes.

Then there’s the confidentiality issue relating to private nonpublic information of customers. And there are various rules around that. And making sure to protect that information, an advisor has to be very careful about what information they take and whether they have consent with respect to that information.

The third bucket to think about is the duty of loyalty, which is basically, an advisor, while employed with their current firm, has a duty of loyalty to act in the interests of the firm. This may create certain situations where the transition must take place in a certain way to make sure that the advisor is not competing with their current firm, while they’re currently planning their transition.

That’s why it’s important to have counsel that you can look to to help you to choreograph the transition so that you don’t violate the restrictions and obligations that you have that we just cited.

Brad: That kind of sums up how there are several factors that need to be considered – I often say navigated.

1000s of advisors have made this move prior. I don’t want to give the impression it’s a walk in the park. It’s not. However, it is generally doable, but you need to navigate each of these variables. There are specialty attorneys like Rich that this is what they focus on.

If you’re listening to this episode, just be aware there are multiple things to consider. We’re going to talk about just one of them on today’s episode, which is this employee related question.

When I say employees, I’m referring to positions like administrative assistant, junior analyst, sales assistant, etc. So on this episode we’re not talking about producing financial advisors.

Rich, any other thoughts on the kinds of positions our conversation would be relevant to?

Rich: The titles can be different from firm to firm, but basically folks who are providing support, administrative, or sales support, or junior brokers, right, that sort of work under the advisor in general. That’s what we’re basically talking about here.

Brad: Yep, and it’s often critical to an advisor that these team members come with them, they’re a critical part of their team, and would be a critical part of the transition.

Let’s start with the low-hanging fruit. It is generally possible to take team members with you. Are there any scenarios though, Rich where it’s an absolute hard no? It’s not going to happen because of variable X? Does that exist? Or is there generally always some conversation to be had?

Rich: When we’re talking about employees at this level, it’s generally going to be okay. I don’t know if there’s a hard no. Again, every situation has to be evaluated differently with respect to what agreements that the advisor has in place and things like that.

It’s much more of an issue when you get to producers. And there are issues with respect to raiding, which, you know, is a topic for another day.

Essentially, the more that the employee is valuable to the firm by way of either special skills or access to certain trade secret information, or most importantly, is that employee likely to cause clients to leave?

Those are the situations that are much more likely to raise an issue for the firm, and to prompt them to take an action against an advisor that is looking to take that employee to go with them.

Brad: Ok, good.  So maybe no across the board hard “no’s.”

With respect to the potential “yes” scenarios, what are some of the main keys that an advisor or team need to be aware of to consider?

Rich: Yeah, good question. The first thing is to make sure to look at an advisor’s agreements. Because there are still agreements out there where the advisor is restricted from taking employees. They’re called non-solicitation of employee covenants. Those can be in agreements.

It’s important to have those evaluated upfront to determine whether they’re enforceable, whether they’re reasonable. Basically, they have to protect a legitimate business interest of the firm. And to evaluate that in light of making a determination as to whether or not those particular restrictions are enforceable.

The more junior the employee, and the less likely that clients will leave with them, in general, the firms are more likely to allow those employees to go with an advisor. Again, every situation is different.

The other thing to think about, which is very important, is that oftentimes it can be very, very important to determine when you tell folks, even if you’ve decided that you want to bring them along, when they go because we see situations where that information is disclosed.

It leads to those employees finding out or talking to other people, where the firm may find out and ultimately, expedite the transition because they are suspicious that the advisor is going to leave and naturally want to circle the wagons to make sure that they protect those clients.

So, it’s important to think about timing as well.

Brad: Yeah, I’ve seen the horror stories. I’m sure you have as well. Where unfortunately that doesn’t go well.

The plans are disclosed to employees ahead of time with good intentions. And either you have, unfortunately, a member of the team that does not have good intentions. Or even with good intentions, the months long process leading up to a transition is more time an employee could potentially slip and make a reference to a home office person, or a client, where it might not be appropriate to have that conversation yet. That could create issues.

It’s hard, if not impossible, to not talk to your team members at all ahead of time. That would be the safest route, but not necessarily feasible. How do you normally advise on that?

Rich: I think it really does depend on the situation. The earlier you notify employees, the greater the risk. But at the same time, there is a certain amount of assistance that you realize that you need as an advisor to make the transition happen. And so it may be important to disclose your plans to those folks.

There are attorneys out there who will say basically, and it is true, the safest thing is not to tell your employees until you depart. That is the legally safest thing to do. But it may or may not necessarily be practical. And it may be worth bearing some level of risk to tell folks in advance.

Each situation is different. But those are the big factors. The closer to the break date that you can tell employees, the better. But then you also have to bear in mind that those folks may have to be involved in the transition process.

Brad: Yeah, and they often are.

We should clarify, as we discuss this, I’m visualizing an advisor in a captive, wirehouse type environment. If someone’s at an independent broker-dealer, and these are their own employees, I assume there’s not necessarily any issues with having the conversations then or does that maybe not make a big difference? How do you separate those two?

Rich: I think it really depends. If they’re the advisor’s own employees, it seems like there’s less likely to be a risk. But naturally, the more interaction you have with folks outside of the advisor’s orbit, it can create more risk. But generally speaking, those types of employees seem to me to present less risk in general.

Brad: Yeah, although the risk is always there of accidentally divulging the plans. Sometimes I’ll have advisors with independent broker/dealer firms tell me, “I’m independent.” And I say, “Yes, you are independent. In theory, you can leave your firm, and even if they were to find out, that shouldn’t be an issue.” But I always say there’s no need to unnecessarily poke the bear, and potentially create challenges where there doesn’t need to be challenges.

So even in the independent space, to your point, there’s still risks. It’s one more voice that could inadvertently share the news with folks you’re not ready to share the news with yet.

Let’s assume I’m an advisor and I have shared the news with my team members ahead of time.  How logistically does that work? On the day that I resign myself, is it typical that the employees would resign five minutes later kind of thing? Or do they wait? Or how does that logistically typically work?

Rich: Well, oftentimes, they’ll resign at the same time, or the resignations can be submitted at the same time. Again, every situation is different. But oftentimes, they just basically happen at the same time.

Brad: Ok, now let’s let the pendulum swing, and assume an advisor has not told certain employees ahead of time. Once the adviser has resigned, can they immediately reach out to the employee?  There’s a balance with the potential solicitation issues, but they can’t just leave the team member hanging.

And so can they literally try to contact them right away? Or typically, how does that work when the employee’s not told ahead of time?

Rich: Well, I think that at that point, the advisors, I mean, can at least notify employees that they’re leaving. Now, the issue of soliciting can be different and you have to look at, again, those restrictions and whether or not you’re comfortable with them.

But basically, you can let the employees know that you are determining to transition to another firm. And generally speaking, that should not violate the restrictions on solicitation of employees itself. So I think once you transition, generally, you should be able to do that.

Brad: You mentioned earlier the topic of raiding – we could probably make a whole episode on that – but at a high level, are there any concerns of how many employees you might take? That’s probably a loaded question because a lot of variables involved.

If I’m an advisor, and I have one employee, that’s a different scenario than if I’m a larger advisor group, and we have five, six, seven employees. Is there any kind of limit to how many team members you should arguably try to take? And again, that’s a loaded question that’s going to be tough to answer. But any thoughts at a high level?

Rich: Yeah. So there’s no hard number. But generally, the more of an impact that the folks you’re taking with you will have on the current firm. And again, that’s mostly folks that have special skills that are hard to replace, or who have client relationships that are likely to leave. That’s more likely to trigger a claim that you are raiding the current firm.

We can get into it another time, but raiding is not itself a specific legal claim. It oftentimes is born out of tortious interference or interference with the current firm’s business or unfair competition practices.

But by and large, it is more focused on what the impact is to the current firm.

Brad: What roles those folks were playing.

Rich: And most importantly, probably for the firm, how many clients are likely to go once those employees go too?

Brad: This next question is taking your legal hat off, and looking at this as a business owner. Thoughts on advisors that strategically want to take some employees, and maybe they’re using this as an opportunity to not take other employees?

There could be some awkwardness in that. Maybe even some legal considerations. Any thoughts on this?

Rich: I don’t think that it’s so much of a legal issue. You can decide you want to take certain employees or not. Generally, employment is something called at-will. Basically, you can decide to hire and fire employees or not take them with you when you want.

But you may have to manage some of the issues with potential backlash. You have to think about that. If you’re leaving certain employees behind, that may create resentment, and potentially the opportunity for those employees to report back to the firm things that they uncover if you haven’t necessarily planned well. The firm may become aware of things because you have a dissatisfied employee who isn’t brought along to the new firm.

Brad: Hopefully those scenarios are few and far between. But I could see where that can create challenges.

We won’t name the firm, but there’s a firm well known for having one advisor and one sales assistant in the office. The sales assistant is typically hired by the firm and placed in the office. If the relationship between the advisor and sales assistant is not good, there can be those scenarios where, we’ll just say, you’re not always playing on the same team.

Some tricky situations that, thankfully, don’t impact most advisors, but it can be relevant. I appreciate your thoughts on a tough question there.

Moving on, some advisors start their own RIA, while others join an existing RIA firm.

With what we’ve been talking about there, does it make a difference between those two scenarios? Does it change the advice or is it relatively the same?

Rich: It doesn’t necessarily change the advice. But there may be certain things that you can look to. If you’re going to another firm, and you want some level of comfort or protection, you may as part of your negotiation as an advisor to join that new practice, say, “I need some cover in the event that I want to take these employees. Are you willing to bear some or all of the legal costs, if somehow the old firm comes after me.”

You might be able to negotiate that if you’re joining a new firm. That may be one of the things that you can benefit from if you’re doing that.

Brad: That will depend, of course, on the structure of the firm you might be joining. If they’re a traditional W-2 firm or a 1099 firm, there would probably be different answers to that question, but could be relevant indeed.

Next question is to simply plant the seed of another thing advisors should maybe be thinking of. An RIA path is often the first time an advisor themselves will now be responsible for having their own employees.

If they have their own RIA, their team members are going to be formal employees of their firm. This is maybe a topic for a different episode, but just to plant the seed, is it typical that at that new firm, among all the different things you might set up for that new employee – payroll, benefits, things like that – that you would also want to have an employment agreement put in place with your new firm, and these team members that come with you?

I assume that’s pretty typical, but thoughts to maybe plant a seed for a future topic we could discuss as well?

Rich: A hundred percent. And thinking about employment issues, while not typically sort of on the forefront of what most transitioning advisors think about, it is still important.

Whether you hire someone as an employee or an independent contractor – and that could be a whole topic in and of itself – you want to have an agreement memorializing the terms of those agreements, including whether or not you as an advisor launching your own firm, want to impose restrictions on those folks taking clients or taking employees with them.

It’s important to memorialize those relations and employment agreements. But it’s also important to think about the employment laws that will impact your practice. While there are securities laws that impact your advisory practice, there are also employment laws. It’s important to be aware of those.

In certain situations, you may want to have an employment handbook that lays out what employees are expected to do and to refrain from doing.

We help folks put together employment agreements, where that makes sense as well. So, yeah, this is a very important topic that should not be ignored when looking to launch your own firm.

Brad: If an advisor were to call you up, reach out to your team, reach out to your office, whether they want to talk about today’s topic, or some of these other variables we’ve touched on briefly, how does a consultation typically go?

Does that start with an introductory call with you or someone on the team and you determine whether you’re a fit for each other, and then you engage and then take next steps?

To set the tone, what happens if an advisor or team reaches out to you or your practice to dive into these topics?

Rich: Great question, Brad. Folks are welcome to reach out to me at any time. I tell folks that I am happy to have a conversation whether or not folks retain us.

Ultimately, I enjoy providing helpful guidance. Naturally, we can only provide legal advice once we’re engaged. But I’m happy to think through and talk with advisors, especially because this can be a very scary process. There are a lot of legal issues to think through. But we try to help break it down for folks so that it’s a bit easier to understand.

And as Brad said, folks do this all the time. And in the vast majority of situations there are no problems as long as well-choreographed path is followed.

But basically, when folks reach out to us we have an intro call with them. And it’s me that does that. We talk through the advisor’s situation, their goals, and then help them to chart a course for their transition.

Typically, we can’t get into too many details before we have an engagement letter. But once we have an engagement letter, we help the folks that want to engage us to chart a course. Looking at their employment agreements, and their other sort of policies that they have at their current firm, and then evaluating the laws that are applicable to their specific transition.

And then, if they’re launching a firm we help them go through the steps of forming an entity and drafting commercial agreements, client agreements, employment agreements, as we talked about. Basically help them to navigate that process, as much as we can.

Brad: That’s a big part of your value proposition is helping advisors with questions they don’t even know they should be asking. They might come to you with a specific question or a couple of questions. And you can help them with that. But it’s also, “Oh, by the way, have you also thought through X, Y and Z?”

There’s a lot of value in that. This doesn’t have to be a scary process. The reason it’s scary is because there’s a lot of unknowns.

You need to lean on people that will help you become aware of what you don’t know to be asking in the first place, and then how to solve for those things as you work through the process.

Rich is fantastic at that. I’ve known him for several years now. He’s a wonderful resource.

For advisors or teams that want to reach out and ask about today’s topic, or any of these other legal issues, what’s the best way for them to get a hold of you?

Rich: They can go to my website, which is www.richardlchen. My first name, middle initial, chen.com.

Or you can email me at [email protected]. Always happy to be a resource.

I look at our role as basically being a guide, help you chart the course, think through the things that you may not necessarily be aware of, that’s what we do.

Brad: I will include that contact information in the show notes. So reminder, this is episode #80.

If you head to TransitionToRIA.com, you can find the entire video series. Just look for episode #80 and you will be able to find that contact information.

Also go check out the first episode I did with Rich, which was episode #52. Rich did a wonderful job there as well talking about how to structure the ownership of an RIA. A lot of great information there as well.

It’s always great to have you on, Rich. You might at some point be my first third-time guest. So if that happens, I’ll thank you in advance. But thank you for coming on today.

Rich: That would be great, Brad. As always, great joining you, and thanks for having me.

Brad: All right. Thanks now.

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