Q145 – When Do You Need Legal Advice As Part Of An RIA Transition?

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Also available as podcast (Episode #145)

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When Do You Need Legal Advice As Part Of An RIA Transition?

TL;DR – Obtaining legal advice on how to safely navigate the departure from your current firm is a necessary step with almost every advisor transition scenario. Whether you are currently already in an independent model, or still in a W2 captive model, almost all scenarios warrant obtaining proper legal advice. There are over a dozen different variables that might be applicable to your particular situation that you need to be mindful of regarding how you might need to address them from a legal and risk mitigation perspective.

Host:

Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”

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Full Transcription Of Video:

When do you need legal advice as part of an RIA transition? That is today’s question on the Transition To RIA question & answer series. It is episode #145.

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

If you’re not already there, head to TransitionToRIA.com where’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. A Vendor Profile Series. All kinds of things to help you better understand the model.

Again, TransitionToRIA.com.

On today’s episode we’re going to talk about a very important topic that is applicable to pretty much every transition.

The title of the episode is about the RIA model, but a lot of these topics are applicable if you’re making a change within any of the channels within the industry. But we’re going to focus on the RIA model.

So, the question comes is… “do I need legal advice as part of the process of transitioning my practice from wherever I am now into the RIA model?”

I talk a lot in these episodes about how there are a lot of steps that go into this whole process. Both from first learning more about the RIA model, is it even something you should be exploring? Will it even be a fit for your practice? Are you going to accomplish what you hope you will accomplish by moving to it?

So, everything from that first step to understanding all the pathways that you could take into the model. And then ultimately all the different pieces that you must put into place.

One of those pieces is to get legal advice to help you with the departure from your current firm.

Now, long run there might be instances where you need or want legal advice related to that going forward state, or the operation of your RIA or whatever the case is. But in today’s episode what we’re primarily talking about is do you need legal advice to help you navigate the departure from your current firm?

The short answer with that is in almost every instance, the answer is yes.

Now, some of you might be thinking, well, I’m already independent, I’m at an independent broker-dealer, I don’t need legal advice.

Part of what I wanted to do with this episode is to show where, even under those “independent” scenarios you might be in now, it’s still advisable to get the legal advice.

And for those of you that are in a more captive W2 type environment, you certainly will understand why you want to have legal advice.

So the short answer is, yes you generally will always need and want that advice.

What I want to go over on today’s episode is to give you some of the variables that will drive the need to do that. Now my goal here is to not scare you from making a transition by pointing out all the legal ramifications or things you want to make sure you navigate correctly.

What I wouldn’t mind doing, if that’s what it takes, is to scare you into accepting the fact that you should get this legal advice.

But it is a tried and true process, and provided you get good legal advice – I’ll talk about it towards the end how you can go about doing that – this is a process that can be navigated. But again, you’re going to want to get that advice.

I want to give you several variables, several reasons you might need this legal advice and that are often part of the conversations when talking to an attorney.

The biggest variable, the one that generally always comes up first is… do you have some sort of agreement you’ve signed with your current firm?

In pretty much every instance, there is some sort of agreement involved. Whether you’re W2 wirehouse, or you’re in some sort of independent broker-dealer.

In all my years, the only time I’ve come across where some agreement apparently – from at least what the advisor’s recollection is – was not signed is they are with some very small firm, and arguably due to sloppiness on that firm’s side, that firm never had the advisor sign something memorializing the affiliation. That’s the only time I’ve seen it where it appears to have ultimately not ever existed was because of sloppiness.

So again, in almost every instance, there is something you did sign at some point. There are many clauses in those agreements that you want to be aware of. That is what an attorney can help you navigate.

I’m going to go over some of those clauses. Some of them may apply to you, and others not the case.

Non-solicitation

A common variable that’s in agreements is a non-solicitation clause.

There are a lot of firms, that you could be at right now, where this is boilerplate language. In their agreement, they include a non-solicitation clause. If you leave, you cannot solicit your clients when you leave.

Now, that’s a rant I could go on about why you’d ever want to be at a firm where after you’ve gone out and found clients over the years or decades, that now if you were to leave somehow those aren’t your clients to be able to solicit to bring with you to another firm.

That’s a whole separate topic. I could rant about that non-stop, that alone. But the idea is that often there is non-solicit language in agreements.

However, just like many of the things I’m going go through here, that is not a deal-breaker per se. That’s not a dead end. But it is provoking… if that language exists, how are we going to safely navigate it?

Again, that’s where it comes back to the conversation with the attorneys to make sure you do not run afoul of that language.

Non-compete

Others of you might have non-compete language in your agreement.

Now, non-competes are less frequent. Several states have planted a flag in the ground that says they don’t really recognize non-competes, or they say they’re anti-competitive.

Depending on what state you’re in, it could have different ramifications. But there are times that non-compete language is included.

Sometimes those clauses are as simple as… you can’t compete within a 10 mile radius for a 12 month period.

Others, it’s very harsh-sounding language that you can’t almost compete indefinitely. And the good news is that sort of thing is generally going to get discarded or thrown out if there ever was some issue because there is usually precedent that has shown that that is way too onerous to expect someone to have to follow.

But nonetheless, again, there could be non-compete language that you want to know if it’s in your agreement, and understand what your options might be with it.

Non-client acceptance

An even further restrictive variable, and this is less frequent, but it does happen from time to time, is there might be non-client acceptance language buried in your agreement.

That language typically says… not only can you not solicit clients, on the chance those clients reach out to you on their own, you can’t accept them as a client of yours.

That language is somewhat rare, but where you typically see that is if you have sold your practice to some buyer. It’s quite understandable that the buyer of your practice is going to have some of this language in there particularly perhaps a non-client acceptance.

Which is fair. If you are selling your practice to someone else, just as if you were on the other side of that coin (as the buyer), it is fair for them to say… we’re going to provide you monetary value for your practice, you can’t take our money and then six months, twelve months, wherever,  set up shop and then try to steal the clients or take the clients or if the clients reach out to you, we expect you to say you cannot help them.

That succession scenario is typically where the non-client acceptance comes in. You do need to honor both the word and spirit of that sort of arrangement.

But I have seen that language slipped into even non-selling scenarios as well. So something to be aware of.

Privacy policies

You also need to be aware of potential privacy policy issues, both from Reg SP – which is an industry privacy policy regulation – and then your firm might have specific privacy policy language that you need to be familiar with as well. The latter is primarily related around what client information you can or can’t take on the way out the door.

So, that privacy policy variable is very important to understand as well.

Broker Protocol

Related to that is the broker protocol.

For those of you that are familiar with the broker protocol – I did a separate episode on what it is – under certain circumstances, and it’s beyond the scope of this episode, but under certain circumstances, there is a mechanism where you could potentially free and clear without any issues, take certain pieces of client information with you, with the full understanding of the firm you’re leaving that you are doing so.

There are very specific rules around that, which must be followed to a T. But if it’s available to you, that might be advantageous for you to utilize.

That’s another variable you’d want to understand… is this a potential broker protocol situation that I could either take advantage of it, that I need to be mindful of, that if I were to do it as such, there’s specific rules relating to it.

Soliciting employees

Next, oftentimes advisors and teams want to take team members with them, administrative staff, sales assistant staff, etc.

If you’re at a W2 firm now, as is common with a lot of occupations where you are employed by someone, oftentimes there could be language about not soliciting employees of that firm to leave the firm and go in whatever direction you’re going in life.

That is whether in this case to an RIA, or if you’re starting some other business, you might not be supposed to solicit employees away from that employer.

That’s often in there by boilerplate. It’s not to say it can’t be navigated. I’m not suggesting you can’t ultimately have team members come with you. But you would want to be aware of… do I have language in my agreement about that? And if I do want to bring team members with me, how best can I navigate that to make sure I’m not going to create issues for both myself and the team member?

Equity

Another thing, and these are not any particular order, is if you have outstanding stock that you’ve been granted, sometimes called RSUs, restricted stock units.

Perhaps that equity is not fully vested yet, and if that’s the case, you certainly want to understand… what exactly happens if I leave and here’s the vest arrangement of those shares, what do I get to keep, what do I not get to keep?

Even if you feel you’re fully vested in perhaps RSUs or equity, unfortunately I have seen scenarios where an advisor team – there’s one specific that I can think of – where they thought they understood fully what their situation was and that they had equity and that they were fully vested and there was no reason to worry whether they can leave and that equity can go with them.

Well, it turns out there was language buried in an agreement they signed along the way that, I forgot what the exact terms were, but the language basically said… if you leave us and you don’t give us (for example) a 15-day notice that you’re going to leave (Note: Normally you depart right away after given notification._, but in this case, the firm had slipped in, years later after the original equity grant had been made, some language that if you don’t give like this 15 day window, that you automatically forego and lose that equity.

Obviously that could be problematic if you’re under the assumption you’re going to have this equity as part of your wealth, part of your assets going forward. If it turns out there was some clause in an agreement that you didn’t catch or that you didn’t navigate correctly, that could be very damaging.

Deferred compensation

Another thing to be mindful of is you have deferred comp.

If you’re at a large W2 broker-dealer type firm, unfortunately you probably do have deferred comp. And by nature of how deferred comp is designed, you’re essentially on a treadmill where at any given time you always have some amount that is unvested. The only way to fully vest all of it typically is you must ride out your career and retire from the firm and go through their often called sunset program. Short of doing that, you typically will have unvested portions.

I did an episode on how to economically overcome the fact that you’ll lose deferred comp and how you can manage that going forward on your new path in the RIA space.

But you would want to be aware of… what is my situation with my deferred comp?

Whatever your assumption is of what you will or won’t be able to keep, is that accurate? That’s something you want to talk with the attorney about.

Sunset programs

I just referred to the sunset programs many W2 firm have. Another variable to consider is if you either recently, or even long ago, were on the receiving end of a retiring advisors practice as part of one of these sunset programs.

Typically that’s something you navigated with that advisor over several years and that advisor has been paid out over several years.

Even if that’s fully ran its course, or maybe you’re still in the middle of that, along the way you might have signed some sort of agreement that had some language that then restricts you in different ways than just your traditional agreement.

So if you’ve been on the receiving end either recently or even a long time ago of one of these sunset programs, that’s another reason you want to go over that with an attorney as well.

Forgivable loans

And then the final two things with respect to language in agreements.

First, if when you joined the firm you’re at now they wrote you a big check on the front end, those are typically tied to what’s often referred to as a forgivable loan.

Particularly with the big wirehouses, that might be give or take a 10 year loan period. Well, if you’re still in that period and you leave, obviously they are going to want some of that money back. Which technically, you’re just repaying the unpaid balance of the loan at that point.

But you will want to fully understand… what exactly will I owe back? What is the expectation of how quickly the firm’s going to want it back? How can I try to make that process as smooth as possible and not give my prior any sort of ammo to otherwise come after me?

So if you’re in that forgivable loan period you’re going to want to be mindful of that as well and talk to the attorney about it.

Retention bonus

And then the last piece regarding agreements – again, this is not an exhaustive list, but hopefully you see there’s a lot of potential variables here – but the other one is if you’re at a firm that was acquired by another firm, and you sat tight and went along on the ride to the new firm, and you got some sort of retention bonus for doing so, you signed something when you got that retention check and typically there’s language in there that you want to be mindful of.

Perhaps there is a certain period before you may or may not owe some of that money back. Or other possible restrictions associated with it.

So, if you’ve received any sort of retention bonus, you want to be mindful of that. That’s the thing that an attorney can help you navigate.

Those are some of the variables that are potentially in agreements that you’ve signed off on, that you potentially want to be mindful of.

Most of you are not going to have all of those by any stretch of imagination, but even if you have just one, two, three of them, hopefully you’re understanding by my comments here why it’s important to make sure you fully understand them and fully navigate them correctly.

Client communication

Now for some other things that these attorneys can help you with beyond just what’s in those agreements.

It is also important, and which they will coach you on, based on whatever your agreement situation is, what you can and can’t say to clients after you’ve left.

So for instance, if you have a non-solicit, you’re not going to just call a client up and the first thing you say to them is a blatant solicitation… “I’ve started a new firm, I’d love you to come join me at the new firm.”

Arguably that’s a solicitation. There are ways to navigate around that, as there is generally precedent of what is or isn’t typically considered a solicitation.

But it’s important, again, based on what your agreement is, how you communicate with clients initially after your departure. That’s a big part of what these attorneys will help you with, coach you on.

Related is when you talk to your clients about this.

In most every instance, the short answer is you do not talk to clients about this until you’ve resigned from your current firm. You don’t talk to them ahead of time about it.

That’s for your protection, and also to not involve the client in any potential issues that your firm might want to try to bring up.

Now some of you, I get it, are saying… “I’m already at an independent broker-dealer, I’m already independent, I should be able to do that.”

Well, again, the devil’s in the details. What kind of firm are you at now? What have you maybe signed or not? The attorney can help you understand where you’d be on that risk spectrum. Obviously, it’s easy for them just to say, kind of what I did, don’t talk to clients ahead of time. If you are insistent though, perhaps with some of your biggest clients, at least you’d want to hear what the attorney has to say about what risks that might be bringing upon yourself if you were to do that.

So again, when you tell clients is also important.

Client information

It’s also important to work with the attorney to know what client information, what client documents you can take with you.

I alluded to the broker protocol earlier. If you are doing a protocol transition there is very specific information you can and can’t take, and you even must notify your firm of the information that you’ve taken.

Just because you’ve known someone that’s left your firm before, and they did X, Y, and Z with the documents or information they took, maybe they got lucky and it just wasn’t an issue for them. Or maybe they shouldn’t have done that. Or maybe they were allowed to do that. But your situation might be different.

So again, understanding what client information you can take is important as well.

Resigning

And then the last item I’ll point out here, and this seems like a smaller item, but it’s still important, is literally how to resign on the day that you’ve mapped out that you were going to do so.

You might think that is simple. But it can be complicated because what happens if there are multiple advisors on your team? Are you all resigning simultaneously? Does someone start first and then other people follow?

What about those team members that you’re hoping to bring along? Are they resigning on that same day or are they waiting a couple of days to resign?

When and how you resign is another important variable you want that legal advice for.

The reason I say all this is, again, to point out that getting such advice is an important step in any transition.

Specialty attorneys

The good thing is there are specialty attorneys that this is the main thing they do, is help advisors navigate the departure from their current firm.

Now, sometimes advisors will tell me they have a buddy that looked at their contract and gave them feedback. Well, it turns out the buddy is their old college roommate that went to law school, but is a personal injury attorney, not a contract attorney. And certainly not someone that knows our industry.

You want specialized advice and there are specialized attorneys that can provide that advice. So you might as well go to them for this sort of thing.

Part of the benefit of these folks being specialized is that the good ones have been doing this a long time have done this hundreds and hundreds of times. Some of them do hundreds of per year.

They know, based on the type of firm you’re at, this is typically how your firm might react to you leaving and these are the things we want to be extra sensitive to or be extra precautious about.

You get to benefit from their years of experience doing this with hundreds and hundreds of advisors that have come before you. There’s no reason for you to reinvent the wheel on this. Benefit from all the experience that they have.

Now another part of the experience they have is oftentimes advisors and teams understandably don’t have a copy of something they signed, sometimes because they joined their current firm 20+ years ago and they either never got a copy then, or they got a copy and life has gone by for two decades, they’ve moved and they have no idea where a copy of that is.

That’s not as ideal obviously as knowing or having a copy, because the attorneys would like to see a copy of what you have. But if you’re in that scenario where you do not have a copy, the next best thing is these attorneys, because from their experience and having done this so much, typically they’ll be able to look into their vault, if you will, and say… based on the firm you’re at, based on the time you joined that firm, our experience says from having done all these other ones, from advisors in that exact scenario, you likely signed an agreement with this language.

You benefit again from their knowledge of that. So for those of you that can’t find your agreement, that’s going to be very invaluable. That’s the next best thing is they can try to draw that out as best as possible.

And then the final thing, if it’s not already apparent by me pointing out all these possible times you might need the legal advice, it’s just a cost of doing business to do a transition correctly.

There are a lot of things that must be solved for as part of a transition. There are a lot of moving parts. There are a lot of costs involved.

I’ve talked about in different episodes why all that effort and all that cost and all the work you go through in a transition is generally always worth it on the other side. That’s big thing I help advisors with is what will that other side look like and let’s make sure that the journey’s going to be worth the destination.

Legal advice is one of those requirements, and if you’re not able or willing to spend, typically a couple thousand dollars at least, on attorneys to make sure you’re going to depart your firm successfully, you probably shouldn’t be making the transition.

As I said, it’s just a cost of doing business, a cost of doing a transition successfully.

With that, like I said at the top, my name is Brad Wales with Transition To RIA. This is the sort of conversation I have with advisors all day long. While I am not an attorney myself, I help you understand all the gaps, and all the steps in this process and help you understand why and how legal advice is generally needed. I can help put you in contact with these specialty attorneys to fill that bucket in the process.

Again, I can’t stress enough how important that is. If we have a one-on-one conversation with each other, you will hear me say it again to you directly. It just is a very important thing that you need to consider and you need to solve for.

First things first though, head to the website, TransitionToRIA.com where as I said at the top, you can find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series.

At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.

Again, TransitionToRIA.com.

With that, I hope you found value on today’s episode, and I’ll see you on the next one.

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