How bank-based advisors can jump firms without getting sued

Whenever bank-based advisors consult him about changing firms, Scott Matasar makes sure they take one crucial step: adding their contact information to their resignation letters.

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The reason? Financial Industry Regulatory Authority guidance says firms should tell clients who inquire about a departed advisor how they can get in touch again, said Matasar, co-founder of the law firm MatasarJacobs in Cleveland.

By including a cell phone number and personal email, advisors leave former firms no excuse for failing to pass along the information.

“They don’t have to volunteer it,” Matasar said. “But if the customer flat out asks, ‘What do you mean you’re my new advisor? Where’s my old one? How can I get a hold of him?’ They’re obligated to hand that out now.”

JPMorgan’s recent succession of lawsuits accusing former bank-based advisors of improperly soliciting their ex-clients’ business has brought such considerations to the forefront. But JPMorgan is far from alone. Many firms with wealth managers in their banking divisions can prove aggressive when those bank-based advisors leave for a new company and try to take clients with them.

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Bank-based advisors frequently face lawsuits when switching firms

Of the roughly 300 advisors who consult Matasar annually for legal guidance when changing firms, only a handful end up in litigation. But of those who do, a disproportionate share are bank-based advisors.

That’s why precautions like including contact information in resignation letters are particularly important for advisors who work out of a banking division. Because many of their clients started as banking customers, bank-based advisors have a weaker claim than their counterparts to having built their books of business solely through their own hard work.

Matasar said it’s a misconception that the clients have to stay with the bank’s services when their bank-based advisor leaves. FINRA rules enshrine clients’ right to work with the financial advisor of their choice.

“Most advisors go to a bank channel situation because they haven’t got a ready-made client base to work with,” Matasar said. “But that doesn’t mean that the bank, whether it’s JPMorgan or anyone else, owns those customers.”

Phil Waxelbaum, the founder of the recruiting firm Masada Consulting, said advisors of any stripe can be and often are sued for leaving a firm and trying to take clients with them.

“But the risk is even higher when you’re in a bank channel because if the bank had a pre-existing relationship with the client, and they established that this was a referral of a pre-existing bank client, then what did you do?” he said. “You were a highly professional employee of the bank, operating in the bank’s best interest.”

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Recent JPMorgan filings against former bank advisors

JPMorgan’s latest suits against former bank-based advisors came last week with actions filed in federal courts in New Jersey and Virginia. The first of the two accuses an ex-advisor in New Jersey named Ali Asgher of violating a contract clause barring him from soliciting his former clients for a year after he resigned on July 6 to join Wells Fargo. Similarly, the Virginia suit alleges that former advisors Cody Rankin and Emilia Penney breached nonsolicitation agreements after resigning in tandem on June 11 and moving over to Morgan Stanley.

Both suits contain language that runs like a refrain through JPMorgan’s legal actions against its former bank-based advisors. The complaint against Rankin and Penney contends that the “Defendants sat at their desks at a JPMorgan Chase bank branch and were introduced to hundreds of existing bank clients (with or without investment accounts) to offer and provide access to investment opportunities through Chase Wealth Management.”

“As Private Client Advisors,” the suit continues, “Defendants were not expected to engage in cold calling or attempt to build a client base independent of referrals from JPMorgan.” JPMorgan declined to comment for this article.

Sharron Ash, chief legal counsel at Hamburger Law and a specialist in advisor transitions, said firms that file lawsuits like JPMorgan’s are doing more than simply trying to retain clients and assets. They’re also sending a message to other bank-based advisors who may be thinking about leaving.

“In some ways, this is what JPMorgan puts out there as a cautionary tale to keep advisors in their seats,” Ash said. “It’s a retention strategy. But the other way to look at these cases is this is the way to stand on the shoulders of others and understand: How do I navigate this so that it’s not ‘I’m not the next one’?”

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How bank advisors can avoid getting sued

Ash and Matasar said bank-based advisors’ ability to avoid lawsuits, or come out relatively unscathed should they be sued, depends mostly on the employment agreements they signed with their previous firms. In JPMorgan’s suits, for instance, the targeted bank-based advisors all stand accused of violating year-long solicitation bans in ways that have already cost the firm clients and assets under management.

Asgher, for instance, is alleged to have already moved $4.8 million in assets and three client households over to Wells Fargo. As in its other suits, JPMorgan is asking for a temporary restraining order barring him from reaching out to other clients until the dispute can be resolved before a FINRA arbitration panel. All told, Asgher worked with nearly 470 client households and $300 million while at JPMorgan, according to the suit.

Waxelbaum said one distinction advisors can make is between clients they brought with them to a firm’s bank channel and those later acquired through referrals. In fact, JPMorgan provides its new hires with a form to list any such pre-existing client relationships.

Failing to fill it out is a missed opportunity.

“But nobody on their wedding day looks out at the bridesmaids and tries to decide who’s going to be their next wife,” Waxelbaum said. “So is that a place where brokers or advisors slip? Yes. It’s not a priority. The priority is getting settled in business.”

Many solicitation lawsuits also revolve around a few key questions: Who initiated contact after an advisor’s departure? Was it the client eager to maintain a relationship? Or was it an advisor seeking to pull over as many investors as possible to a new firm?

The disputes are usually settled before reaching FINRA arbitration. The results are seldom made public and tend to vary widely.

“These are very in-the-weeds, fact-specific cases,” Ash said. “You get different outcomes depending on those facts and circumstances, depending on the state you’re in, depending on the judge that you get.”

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How the Broker Protocol comes into play

Besides violating nonsolicitation agreements, departing bank-based advisors are often accused of running roughshod over contract provisions obliging them to keep client data confidential. Matasar said any such allegations that firms toss into a lawsuit should be taken with a “Himalayan block of salt,” at least until the accused have had a chance to respond.

Still, when the subject of litigation is a bank-based advisor, client information tends to be treated differently than in lawsuits directed at other types of wealth managers. In much of the industry, advisors’ ability to take client data with them is protected by a voluntary interfirm pact known as the Broker Protocol. As long advisors confine themselves to taking only client names, addresses, phone numbers, e-mail addresses and account titles when they leave, they’re shielded from legal liability.

But not all firms have joined the Broker Protocol. And some big member firms don’t allow the protocol to cover their bank-based advisors.

JPMorgan, for instance, applies the protocol protections only to its J.P. Morgan Securities subsidiary, built largely from its purchase in 2008 of the failed brokerage Bear Stearns. Its bank-based advisors are deliberately excluded.

As a result, advisors in JPMorgan bank branches must live with much tighter restrictions. But again, that doesn’t mean they are handcuffed, Matasar said.

When leaving a firm, advisors are generally allowed to send out “tombstone letters” simply announcing their exit plans. That passes the baton and makes it incumbent on clients to continue the relationship if they so choose.

Advisors who want to ease that continued contact should ensure clients have the means to stay in touch well before sending out any departure notification. One way to do this is for advisors to give clients their cell phone number, although they should tread carefully if their soon-to-be former firm has an internal rule barring them from discussing business matters on personal devices. Advisors can also connect with their clients on sites like LinkedIn, although they should be aware that statements made on public forums can later be used as evidence against them.

Waxelbaum said some firms that recruit advisors out of rivals’ bank channels will let them call their former clients simply to announce their moves.

“Only making the announcement and nothing more,” he said. “But that’s a slippery slope because it does open up the prospect of ‘he said, she said,’ since there is no recording of the phone call.”

When it’s time to call a lawyer

Firms sometimes have to be reminded of their responsibility under FINRA guidance to provide contact information if a client wants to reach a departed advisor, Matasar said.

“I unfortunately see all the time where firms don’t abide by that obligation, and I get reports back that firms are refusing to hand out the information upon request, requiring me to send a stern letter to branch management,” he said. “That usually has the desired effect.”

Both Ash and Matasar recommended advisors, whether in a bank or not, seek legal help before making a move. Turning to a lawyer 30 days in advance of a departure is adequate; 60 days is better and 90 days even better still, they said.

“There are lots of things I can do to help my clients position themselves for success and to retain a greater percentage of their book if I have more time, than if they just show up on my doorstep two weeks before resignation,” Matasar said.