By Chris Lazarini 

Regardless of market conditions, all firms, be they wirehouses, regionals or independent contractors, seek to remain competitive and profitable by growing their assets under management.  Recruitment of experienced brokers remains one of the most efficient and economical ways of achieving those goals.  In the first half of 2011 alone, advisors having billions of dollars of assets under management changed firms, all with an eye toward maintaining their client relationships at the expense of their former firm.

While the Protocol for Broker Recruiting created in 2004 by Smith Barney, Merrill Lynch and UBS (and now having over 600 signatory firms) may have slowed the number of holiday weekend dashes to the courthouse and arbitration filings involving recruiting matters, it did not stop them altogether.  There remain a host of factors that should be considered when recruiting experienced brokers to best position the hiring firm if it has to defend itself later against potential claims of wrongdoing.

One of the initial questions that must be asked is whether the hiring firm and losing firm are both members of the Protocol.  If so, adherence to the Protocol’s directives should prevent litigation.  If not, following the Protocol’s directives at least provides a platform that may be used in defending against future claims.  That said, even signatories to the Protocol retain their rights to enforce restrictive covenant agreements with their brokers.  Therefore, prompt inquiry into contractual obligations, if any, remains a must.  Even in the absence of a contract, it may be necessary to refer recruits to experienced outside counsel for independent advice with respect to their planned transition.

Consideration must also be given to the numbers game.  The Protocol specifies that its signatories do not lose their right to bring raiding claims – claims that the hiring firm targeted a competitor’s brokers or decimated a branch or complex by hiring from a particular location en masse.  The hiring firm must, therefore, think through a variety of potential issues if it is considering hiring multiple brokers from the same branch, complex or region either at the same time or close in time.  Special care must be taken if the target group includes a manager, as raiding claims can easily turn on a manager’s involvement in recruiting others from his former branch.

Once the invitation to join the hiring firm has been extended and accepted, a timetable should be developed for the resignation, the sending out of general tombstone announcements and the process of direct contact with clients.  Brokers generally don’t like to be told that they cannot speak with clients about their move before it happens and that they cannot copy all of their files, but these types of activities invariably invite litigation.  Thus, clear directives need to be given to the recruit regarding what she may and may not do, along with an explanation of the potential ramifications if those directives are not followed.

Some firms have recruits sign affirmations that they are not taking anything to which they are not entitled.  While the ideal instruction may be to “take nothing”, the Protocol seeks to strike a balance between protecting the privacy of client information and acknowledging the reality of a brokers’ freedom to move from one firm to another.  It allows departing brokers to take names, addresses, including e-mail addresses, and account titles, but also requires that a copy of what they are taking be left with the former firm.

Problems can multiply quickly if information and documentation outside of what is permitted under the Protocol is taken, and are greater still if that information and documentation is used by the hiring firm.  In cases were a broker goes beyond the hiring firm’s clear instructions, the firm may have no choice but to terminate the relationship, a potential result that should be laid out when directives are first given.

In the end, a well thought out and well executed hiring process should lead to a successful hire; one in which the new hire is doing those things that made her an attractive candidate to begin with, instead of one that potentially involves months of protracted litigation and tens of thousands of dollars in legal fees defending the firm against poor choices that could otherwise have been avoided.

(Chris Lazarini is a Member of Bass, Berry & Sims PLC, focusing his practice on the representation of broker-dealers, financial institutions and investment advisers and their registered representatives and agents).