Brian Hamburger founded consulting firm MarketCounsel and law firm HamburgerLaw 25 years ago. In the past quarter century, he has counseled and guided clients through a myriad of issues as the industry developed and changed. This series, “War Stories of the Past 25 Years,” brings you lessons and insights gleaned from his experiences.
Prior installments include “SEC: The Beginning of the Journey,” and “Compliance: Building a Strong Foundation.”
This third installment, “Litigation: Lessons from the Trenches,” covers the changing trends seen in advisor-related legal disputes as they became more complicated and eventually led to mediation becoming a popular alternative to avoid the expense, uncertainty and spectacle frequently involved.
Litigation landscape: What types of legal disputes were most common when you started, and how have they shifted over time?
Hamburger: When I launched the two firms almost 25 years ago, the typical industry dispute centered around a career advisor leaving a wirehouse under the cloak of darkness of a Friday evening, with an attempt to avoid a temporary restraining order (TRO) being filed that same evening, followed by a weekend in federal courts fighting to free the advisor from restrictive post-employment handcuffs.
Advisor transitions have compounded in their complexity, especially in terms of optionality.
Today advisor transitions have compounded in their complexity, especially in terms of optionality. Today’s movements can be to and from RIAs, banks, trust companies, wirehouses and more. The issues have also become more complicated, going beyond TROs and traditional restrictive covenants to garden leave, privacy, data security and trade secrets.
Litigation is also no longer just solving a math problem among seasoned combatants – emotions are a significant factor in today’s disputes. Parties can even opt for a litigation strategy primarily to inflict pain, cause delay, or extract a settlement, leveraging the justice system.
There is an increasingly popular alternative path that is emerging. Through a vast network of trusted industry relationships we have established over the years, we are sometimes able to mediate a deal in advance for a transitioning advisor, avoiding the expense, uncertainty and spectacle of a dispute altogether.
Blind spots: What do advisors get wrong about disputes?
Hamburger: Advisors often presume too much goodwill and trust when their transition is on the horizon, colluding with current colleagues and even managers in a way that may place those persons under an ethical duty to inform their current employer; even building a consensus on how they should proceed.
In our tagline, we position ourselves as the “Adviser’s Advisor,” and that arises directly from these types of situations. Just as an advisor sees the financial landscape more clearly than their most intelligent clients, who can be deterred by emotion and bias, advisors need objective advice when it comes to their employment transitions. Legal counsel also comes with the shroud of confidentiality, while discussions with others is usually discoverable in litigation.
Advisors often leave assets on the table for unfounded fear of reprisals.
Another blind spot stems from the industry’s current method of measuring the success of a transition – percentage of assets transitioned – which is deeply flawed. Advisors often leave assets on the table for unfounded fear of reprisals.
Advisors can actually clear this hurdle with more than 100% as they inform clients of the benefits of the transition, encouraging extra wallet share from clients and the introduction of friends and family. For example, the advisor’s new firm may not have the same restrictions as the former one for advising on held-away 401(k)s or alternative investments, freeing those assets to enter the relationship.
War stories: Can you share a particularly challenging or impactful litigation case you worked on and what you learned from it?
Hamburger: The most challenging disputes we tend to be involved in certainly have some common elements. I recall many instances when we were unaware of all the material facts, so the plan that we are relying upon turned out flawed. This was because our advice leading up to the transition was based upon incorrect assumptions. When we learn of new facts, we reassess their impact to our position.
Staying ahead: How do you help firms avoid litigation before it begins?
Hamburger: Contrary to most assumptions, litigation isn’t akin to a disease that should be avoided at all costs. In fact, at times it is the prudent course of action.
Advisors should approach a transition having already determined their needs, goals, objectives, risk appetite and timing. With that as a basis, they should develop a plan that accounts for their contractual obligations, as well as applicable laws, rules and regulations, including state laws.
This plan, conceived in calm consideration of all the available facts and objectives, must be the guide the advisor returns to when emotions run hot during the transition process.
At times (litigation) is the best course of action to meet the advisor’s objectives.
The plan should include at least one fallback, and sometimes two. For example, plan A may be approaching the former employer for discussion in hopes of an amicable outcome, with plan B being a voluntary termination letter the advisor holds on their person to deliver in case the discussion doesn’t have the intended outcome. Litigation may be plan C, and at times it is the best course of action to meet the advisor’s objectives.
However, the advisor should have zero tolerance for unplanned litigation, and after a quarter century, those advisors that prudently plan and execute the plan with precision should not expect any surprises.
The next installment of “War Stories of the Past 25 Years” will be “The Future: Wealth Management When MarketCounsel Turns 50,” and we will discuss the next quarter century for technology, transactions, regulation and independence.
Jeff Berman, Contributing Editor and Reporter at Wealth Solutions Report, can be reached at jeff.berman@wealthsolutionsreport.com.
