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This article appears in the February 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition or read the articles online.

For more than three decades, Rod Mahrt served his clients at the same firm. But he started to question whether his employer stood between him and his duty to clients.

“I became increasingly uncomfortable” with where the firm was heading, says Mahrt, an executive vice-president and senior portfolio manager at Wellington-Altus Private Wealth in Victoria, B.C., since September 2018.

“As a fiduciary, I was starting to see my options getting more and more limited. If I can look across the street and see that I can get a better rate or a better product but I’m supposed to deal with that one firm’s products, how am I being a true fiduciary?”

After 32 years, he knew switching firms wouldn’t be easy.

“The hardest thing is to reach the point where you want to leave a home,” he says. “I did not go about this lightly, and it was extremely painful to get to that point.”

However, his doubts proved too important to set aside. “Why compromise on where you work?” he says.

Kevin O’Hagan, a financial advisor in Calgary who moved to Edward Jones about four years ago, says he always expected his career would play out in the brokerage channel but wanted to assess his options. At his previous firm, the corporate agenda “overshadowed” his clients, he says. He also didn’t want to be restricted by asset levels as he grew his business.

Melanie Gotts, portfolio manager at Raymond James in Regina, Sask., and Blair Sweeney, associate financial advisor at the firm — the two work together and are spouses — similarly say they switched a couple of years ago because of corporate objectives at their previous firm, such as incorporating mortgages into their business.

Further, a lack of support left them struggling to both serve clients and complete administrative tasks. “A big reason we left is the allocation of support staff was switching all the time and being removed altogether,” Gotts says. “You can’t grow your business if you don’t have somebody helping you.”

Testing the waters

Once an advisor identifies what’s no longer working at a firm, finding a better match requires extensive research.

Stuart Raftus, president at Canaccord Genuity Wealth Management, says advisors should perform due diligence on competitors to find a firm they’d feel comfortable staying with for at least the next 10 years. He suggests advisors meet with plenty of firms and people working within various areas of those firms.

While advisors should learn what each firm offers in in terms of technology, services and products, the most important thing is culture, he says. For example, find out if a potential firm supports entrepreneurs: Will clients be considered yours or the firm’s? Will you be in charge of your own succession? Does the firm push products?

When Gotts and Sweeney were thinking about switching, they interviewed several bank-owned firms and independents, and talked to advisors at these firms. The due diligence helped them realize they preferred an independent.

“We wanted to keep our practice impartial,” Gotts says. They also based their decision on available support, technology and research.

Sometimes, the cultural fit might be wrong for clients. Noah Billick, general counsel and portfolio manager at Dorchester Wealth Management in Montreal, gives the example of an advisor transferring from an Investment Industry Regulatory Organization of Canada (IIROC) firm to an investment counsel firm, like his. Even if an advisor were eager to change business models to align with the firm, clients might not like the change, he says.

While culture is important, so are a firm’s practical offerings. John Novachis, executive vice-president at Investment Planning Counsel in Toronto, says an advisor should consider a change only if the new firm can demonstrably improve the advisor’s business, through services such as automated onboarding or client portals.

In that vein, Mahrt says he assessed 10 firms for everything from infrastructure to compliance to their balance sheets.

He also rated each firm on whether its offerings were right for his clients and team. For example, clients might benefit from better pricing, and the team might benefit from better back-office support.

Will clients follow?

While a move might seem right, advisors must estimate how many clients will transfer with them to the new firm before making a final decision. Advisors are prohibited from soliciting their clients to join them until they’ve announced the move (more on this later).

Raftus says that, when advisors have a record of providing value, clients typically follow them. While most clients follow new advisors to Canaccord within an eight- to 10-week period, he says, clients at a bank, for example, may prefer to stay put.

Better offerings at the new firm will also entice clients. “You’ve got to have a good sense of why you’re making the move and what the value proposition is at the new place” and why it’s better for clients, Billick says.

For O’Hagan, leaving a bank meant leaving some clients behind. Once at the new firm, he explained that it was subject to the same regulated environment as the banks and that clients would have more product choice, but some weren’t comfortable leaving, he says.

Gotts and Sweeney also lost a few clients (roughly 95% switched with them), likely because of ties to the bank, Gotts says. Clients asked about the new firm and its size, and whether investments could be moved in-kind without cost to them. Gotts explained to clients that they’d incur no costs, and that she wanted to be independent and continue to do financial plans and manage investments without having to sell bank products.

Long before their move, Gotts and Sweeney laid some groundwork by explaining to clients that their practice was receiving less administrative support.

Mahrt says clients’ key concern was that their investments remained safe. He told clients to imagine a crane picking up their investments at the bank’s vault and placing them in his new firm’s vault. Since the new firm’s custodian was National Bank Independent Network, assets were being transferred from one Big Six bank to another.

With that explanation, “it became a non-issue,” Mahrt says. Many clients even told him they were his client, not his previous firm’s. “I felt very honoured and humbled,” he says.

Where a move would be too onerous for elderly clients, Mahrt advised them to stay with the bank-owned firm. Gotts and Sweeney’s move was positive for some of their senior clients because the new office was away from the downtown core, with better parking and accessibility. “We see our clients more now than we ever have,” Sweeney says.

Walk away with your book

Advisors should read their contracts before making any moves, says Lisa Stam, employment, labour and contracts lawyer at SpringLaw in Toronto. “Go back and read what you signed up for,” she says. “Everything turns on that. The courts will defer to contracts.”

Advisors should look for details about who owns clients or how to identify who owns them. “You typically can bring your individual clients with you if you brought them in,” Stam says. “There’s an understanding at law that they’ve come to you as their advisor, not to the firm, necessarily.”

However, firms will often insist that they were the draw, she says.

As such, when you start at a new firm, “have a nice clean record” of your book, she says.

Billick says that, absent contract provisions, ownership of a book is fact-specific. For example, some firms guarantee the ownership of a book of business so long as obligations are met, such as repayment of a forgivable loan given to an advisor when recruited.

Billick says advisors should inform their new firms of non-compete or non-solicit provisions with their previous firms, and should consider consulting with an employment lawyer to ensure they stay onside of their contracts. In most cases, the advisor will have to pay for counsel.

“The last thing somebody wants is to give ammunition to their ex-employer to go after them legally,” he says.

Even with a book firmly in hand, advisors should follow protocol as they leave. “The process of how you depart will still matter,” Stam says.

She suggests advisors communicate their move to the firm and clients in a way that corresponds with their contractual obligations.

Finally, make a classy exit, regardless of how you feel about your old shop, Stam says. While a graceful goodbye might have nothing to do with employment law or securities regulation, it helps maintain your reputation as a professional.

“Most people don’t remember how amazing you were for the first decade — or two or three — of your employment relationship,” Stam says. “It’s those final moments when you’re leaving — that’s what people remember.”

Mahrt described his departure as leaving home: walking away from a firm can feel like a solemn act and should be executed with care. “It was very important to me that whatever [my team] did was viewed as taking the high road — legally, and with the greatest respect for my former institution,” he says.

In transition

Having a plan to implement immediately following the announcement to join a new firm will increase the odds of a successful move.

On the morning they announced their departure, Gotts and Sweeney sent out a letter to clients and started calling them. They had reached all clients within five to six days. “You have to phone [clients] quite quickly and get your message out” that you’ve moved, Gotts says. While phone numbers are public information, you can’t email clients without their authorization. She was in a race to contact clients with her previous firm, which also sent out a client letter that first morning.

Stam says advisors must refrain from providing advice to clients in writing (including email) until their licences are transferred to their new firms. Novachis says that takes about five days.

As part of his pitch, Mahrt explained how he decided on his new firm, specifically how the move benefited clients.

Client meetings are required for onboarding, but, if done electronically, the process can take several weeks instead of months, Novachis says. Assets typically transfer quickly following client consent, he says.

For Gotts and Sweeney, the transfer of client assets took longer than expected — a few took more than six weeks — resulting in the new firm contacting IIROC and some clients writing letters of frustration to the previous firm. If she had to do it again, Gotts says she would have given clients an idea of how long it would take to transfer assets between firms.

She and Sweeney were occupied with clients, working at least 12-hour days for the first three months. They met with many clients in their homes to make repapering as convenient as possible.

“We were bringing in new documents signed by clients faster than they could process them in our office,” Sweeney says. Fortunately, the new firm allowed them to hire support for the transition.

With transitioning clients taking at least several weeks, advisors will likely have little revenue during the first quarter at the new firm. O’Hagan, whose transition took about a year to complete, says he experienced a 40% to 50% drop in revenue in the first year. As is typical, the firm helped make up the shortage with a transition package. O’Hagan received guaranteed compensation for a defined period based on his revenue at the old firm, with a bonus for new assets as he built his practice at the new firm.

Settling in

Advisors also face an adjustment period with new systems and colleagues. To help, Novachis’s firm has a dedicated relationship manager. “If you’ve got an issue, that person is chasing it down,” he says.

O’Hagan says learning new systems, software and tools, and integrating them into client processes quickly, took a lot of work. In meetings, he reminded clients that he was the same advisor and asked them for patience.

Client service should remain as seamless as possible, Sweeney says. “Even though it was a transition, clients didn’t know or probably care what’s going on behind the scenes,” he says. “They just want to know that everything we have been doing for the last five or 10 or 15 years is going to continue.”

After putting in the work required for a successful move, shorter-term challenges should eventually lead to longer-term success.

Gotts and Sweeney say they’ve grown their practice since their switch, a direct result of offering better service. Gotts says she can focus on serving clients through discretionary management, not through products. Further, clients have remarked on the firm’s efficiency, she says, from onboarding and documentation to asset transfer and online access. The overall result has been an increase in referrals from clients, Gotts says.

Their only regret about the switch? “That we didn’t do it sooner,” Sweeney says.

Ideal recruits

While advisors conduct due diligence on potential firms, firms in turn size up advisors.

Stuart Raftus, president at Canaccord Genuity Wealth Management, says advisors must articulate a value proposition (holistic planning, for example) and demonstrate its execution. The firm typically looks for advisors with at least $150 million in assets.

Noah Billick, general counsel and portfolio manager at Dorchester Wealth Management, considers recruits’ compliance. “We’ll turn away advisors for regulatory reasons — because they have significant compliance issues in their past,” he says. Other reasons for rejection include lack of cultural fit and too few assets.

Free to fly

A court case from 2000 highlights the distinction between employees who owe a fiduciary relationship to their employer and those who don’t.

Employees deemed fiduciaries would have an “elevated responsibility” to the employer, says Lisa Stam, a lawyer at SpringLaw in Toronto — holding positions of trust and decision-making for the firm, with access to information that would hurt the firm if used against it.

Where there’s no fiduciary relationship nor a contractual restrictive covenant, such as a non-compete clause, “it’s a free market,” Stam says. “You’re free to leave.”

Further, an employer would have to prove that any restrictions on employment after leaving the firm are reasonable. It’s against the public interest to interfere with someone’s ability to earn a livelihood, she says.

Top advice from advisors who switched

  • Be organized/prepared (44%)
  • Do what’s best for clients (33%)
  • Conduct research (30%)
  • Be ready to work a lot (27%)
  • Don’t switch for the money alone (26%)

Source: Fidelity’s 2018 Advisor Movement Study (U.S. advisors)