We’ve all been there: A new and better opportunity presents itself, we’re looking to move up in our careers, or we’re just sick of working for Susan, a hapless manager who is a terrible person on all counts. Regardless of why we pursue newer and better options, it’s essential to act strategically, know your rights, and have a career transition plan in place.
A transition plan is a vision for your future, and, in some cases, it can be a way of manifesting the things you want, like more career growth at a new firm or the ability to start your own venture. A transition plan is also a shield against negative U5 disclosures or employer sabotage. Before you say “sayonara” to Susan, consider developing and following a plan for your transition. Here are seven things you can do right now to make sure your next transition goes through without a hitch.
Find Your Better Fit
Think about it long and hard: What is it about your current firm that isn’t working for you anymore? Do you find yourself clashing with your co-workers or manager? Have your career goals changed? Is there a better way to service your clients? Or do you simply need a new challenge?
The best career move you can make is to a firm that matches your career goals, personality, values, and product interests. So before you take a step in any direction, be sure that the move you’re making is the right one for you.
Figure out What’s Important
Going to a new, already established firm isn’t the answer for everyone. Sometimes starting your own firm with your own rules is, and now you’re at a point in your career where you have enough clients and experience for it to be feasible.
As exciting as starting a business can be, there are some real things to consider before taking the dive. First, think about how you want to structure your new business. Do you plan to run the business on your own, or do you plan to create a partnership with another advisor or team of advisors? Consider that carefully and build it into both your transition plan as well as your business plan.
You’ll also want to clearly define where you’re going to source your initial business capital and map out the costs for staffing, leasing space, marketing, and anything else you may need to help your business thrive.
Know the Makeup of Your Book
Some of your clients are like family, while others...well...you would prefer to leave behind.
These may be relationships that you’ve outgrown, that never had a chance to grow, or that you realized wouldn’t be a good fit overall.
Instead of moving firms with a bunch of extra data and clients who are more of a headache than they are worth, give yourself a fresh start with a book that’s tidy and fits your vision for how you want to grow over the next 3, 5, or 10 years. Begin the process by taking a few minutes every day to comb through your book, and determine which clients you’ll want to leave with your current firm and which relationships or clients you’ll want to take with you.
For best results, split your clients into A, B, and C groupings, starting with the list of clients you want to keep (Group A). Next, create a list with your more middle-of-the-road clients (Group B) as well as a list of clients who you would prefer to leave behind (Group C). Finally, add up the numbers in each list to determine how much financial help you’ll need after attrition.
BONUS: If there is time to do so, add some demographic information, like age, gender, family size, etc. to each client’s profile so you and your successors have a clear understanding of each client's profile.
Seek Transition Help from an Attorney
Whether or not your firm participates in The Broker Protocol, you will need assistance determining the best ways to mitigate risk. Consider talking to an attorney outside of your firm before you phase out of it. An experienced firm can help you identify and navigate any obstacles that may come up when you change firms.
If you don’t have an attorney yet, start by culling a list of firms with a track record of successfully helping advisors to plan and manage their career transitions. At AdvisorLaw, we have specialists and attorneys with the experience to help advisors seamlessly transition from one firm to the next and avoid arbitration.
When determining the best firm for the job, make sure they cannot only help you value your business, find the best fit for your next move, and keep everything confidential, but also that they can offer vigorous defense if your current firm decides to come after you.
Keep the Information You Can Legally Move in Hardcopy or on Your Phone
During a transition, email is a terrible communication channel for contact storage and client discussions. Obviously, your firm can monitor your correspondence, and they can use that information as leverage against you or to cut you off completely. No one wants to get found out by their current firm prior to their resignation so the best way to maintain a low profile is to avoid email altogether.
Instead, consider keeping all the client information that you can legally bring with you in hard copy deliverables. It’s also best to keep all conversations about your transition confined to phone calls on your personal cell phone.
Know and Honor Your Financial Obligations to Your Firm
Brokerage firms often use promissory notes and advances to attract new talent to their organization. Sometimes, the advances can come in the form of forgivable notes that are framed as seed money for helping an advisor grow their business. Taking these resources from your firm is a great way to fast-track your opportunities, but it’s also a way to become vulnerable after your employment.
If you find yourself in a position where you can’t pay the firm or fail to pay the firm, the entire matter could snowball into arbitration, ending with potential marks on your record that can turn you into an industry pariah. Make sure that your attorney is well-versed in note negotiation and payback alternatives.
For over 25 years, Auction Rate Securities (ARS) products were considered safe and sound investments. Then, everything changed in 2008 when investment banks stopped purchasing ARS products at the beginning of the Great Recession. The pause in ARS purchases caused an overall market freeze that snowballed into a massive influx of investor complaints against brokers who were making investment recommendations based on information given to them by broker-dealers who had misrepresented the liquidity of ARS products. The major communication breakdown between broker-dealers and investors as well as the public’s limited knowledge of ARS investments caused brokers to take a major financial hit that still haunts them to this day.
As late as December of 2007, One research analyst even referred to ARS investments as “the conservative’s conservative auction security."
The Birth of Auction Rate Securities
Auction Rate Securities (ARS), were invented by Ronald Gallatin at Lehman Brothers in 1984. This kind of investment issued long-term securities that could pay their buyers interest rates only a little above short-term rates. That was achieved by having periodic auctions to reset the rate. As long as there were willing bidders for the securities, any holder could sell the security at face value whenever there was an auction.
Over time, the Auction Rate Securities market would steadily grow to over $200 billion without any hiccoughs. Investment banks would often act as “bidders of last resort” on ARS products, meaning that, if investors were not bidding on ARS investments, the investment banks would step in and repurchase the ARSs to ensure liquidity in the market. This led to ARS products generally being viewed as safe investments until the US economy crashed in 2008.
Auction Rate Securities Had a Long-Standing Reputation for Being a Safe Investment
With no widespread liquidity issues in the ARS market since the 1980s, and the knowledge that banks were acting as a safety valve for the liquidity of ARS investments, several broker-dealers eventually began representing Auction Rate Securities as cash or money market alternatives. Some broker-dealers classified ARS products as cash and cash equivalents on investor account statements to both brokers and investors. As late as December of 2007, one research analyst even referred to ARS investments as “the conservative’s conservative auction security.”
A Frozen ARS Market Leads to a Rise in Investor Complaints
Everything changed in February 2008 when the market went into a freefall and investment banks stopped purchasing ARSs. The liquidity of the ARS market froze as a result, and the investors who were relying on the liquidity of Auction Rate Securities, began to file complaints against the brokers who were selling them ARS investments. According to those clients, the brokers had deceived them by misrepresented the nature of the liquidity of the securities. The truth of the matter is that the brokers had not done anything wrong; they were just carrying a message. Instead, the broker-dealers were actually responsible for misrepresenting the liquidity of Auction Rate Securities to the brokers.
Had the general investing public been aware of what an ARS is or what happened to the market for ARSs in February 2008 and beyond, this may not be a big deal.
Broker-Dealers Repurchased ARS Investments to Absorb the Blow for Investors
Before they reached a global settlement, many broker-dealers attempted to hand investors more liquidity by giving them the option to take out loans with interest rates that matched the rates of the ARS investments they owned. However, many investors were not satisfied with the offer.
After FINRA Regulatory Notice 09-12 was issued in February 2009, some broker-dealers were required to repurchase ARS investments at par value from individual investors and from some institutional investors. The broker-dealers were also required to make whole certain investors who had sold their ARS products below par value.
Brokers Are Still Feeling the Impact of the ARS Freeze and the Broker-Dealer Communication Breakdown
Ultimately, the ARS liquidity debacle put brokers with otherwise clean BrokerCheck and CRD records into a position where they now have customer complaint disclosures on their U4. Had the general investing public been aware of what an ARS is or what happened to the market for ARS investments in February 2008 and beyond, this would not be a big deal.
Unfortunately, the general public is largely unaware, so when investors see these ARS-based investor complaints on a broker’s BrokerCheck record and read that the brokers are associated with six- or seven-figure settlements, they turn away and look for help from someone else.
The pool of brokers who received these types of customer dispute disclosures include some of the most honest, caring, and professional advisors in the industry, and many were in the industry for decades without a single customer dispute on their Form U4. In many instances, these brokers accurately represented the illiquidity of ARSs at the time they recommended the investment.
In most situations, brokers rightfully relied on the due diligence of broker-dealers, the history of the liquidity of the ARS market going back over 20 years, and the industry’s view on ARSs at the time they made the recommendation. Yet today, brokers suffer from the effects of these blemishes as negative marks on their BrokerCheck and CRD records.
As industry professionals are all too aware, brokers are presumed guilty until proven innocent when it comes to customer dispute disclosures. We at AdvisorLaw have the experience in protecting your livelihood and can help you navigate through the waters of seeking an expungement through FINRA’s arbitration forum.
Executive Vice President
5 Ways to Protect Your Reputation
You’re there for your clients through life’s most landmark moments—births, bris ceremonies, baptisms, graduations, marriages, home purchases, retirements, and even deaths. You become an extension of your clients’ families in some ways, because you share a mutually vulnerable relationship with them. For your clients, it’s all about their lives and their futures. For you, it’s your career and your good name. So what can you do to avoid accusations of wrongdoing from a client or a client’s family, were they to have a negative experience with their investments? How can you stay ahead of the curve enough to preserve your good name?
1. Keep Records on Money Management Consultations
It goes without saying that good, clear meeting notes and copies of your transactions are both key to your career success as well as your ability to defend your good name. Unfortunately, some advisors choose to let this best practice go by the wayside. This is a recipe for disaster, as those advisors will find it difficult to build lasting relationships with clients and defend themselves in difficult times.
Advisors who do keep good records, on the other hand, have a greater chance of self-preservation. Late last year, one AdvisorLaw client was accused of taking out a life insurance policy without his client’s consent. During the arbitration hearing, the advisor was able to present a copy of the life insurance policy application signed by the client. As a result, the advisor was able to have the false accusation expunged from his BrokerCheck profile.
2. Maintain as much client information as you can when you transition
If you plan to transition out of your current firm, take as much of your past client information with you as is permissible by your employment agreement. It may seem unnecessary, but holding on to your client notes can be the thing that saves you, if a sneaky or disgruntled client comes back to wreak havoc on your career.
For example, an advisor client of ours was recently accused of wrongfully selling a tenancy-in-common (TIC) investment to two seasoned investors, just before the 2008 market crash. The claim, raised until six years after the customers sold the investment and the advisor changed firms, alleged that the investment was unsuitable—even though both customers met the suitability requirements for the TIC investment, and the TIC was suitable for the customers, based on their overall portfolios.
During his hearing for expungement of the dispute, the advisor was able to turn the conversation around by providing a copy of the PPM that had been given to the customers. The PPM showed that both investors met the suitability requirements of the TIC and that the customers were made aware of the risks associated with the investments. He was also able to share copies of the customers’ investment applications, a record of the extensive conversations that he’d had with the customers about the investment, and additional evidence to corroborate his claim of no wrongdoing. As a result of the advisor’s ability to provide proof, he was able to remove the wrongful claim of unsuitability from his BrokerCheck record.
3. Set realistic expectations around investment performance and strategy
Trust and vulnerability are key pillars in the advisor-investor relationship. Your investor clients are constantly vulnerable to your recommendations and judgment, and they’re trusting you to do right by them. To protect your good name, your best bet is to always act in the best interest of the client and to set realistic expectations for an investment. Be explicit and candid about the risks, and avoid inflating the investment’s potential outcomes.
4. Avoid Selling Unnecessary or Unsuitable Products
Sometimes, you may find yourself towing the line between generating profits for your firm and acting in the best interests of your investor clients. While your clients’ needs always take precedence, there might have been times when you found yourself pressured into a situation where you felt the need to facilitate a transaction for a proprietary product that the client did not need or select an investment that wasn’t a good match for a client’s risk profile.
Being objective in a sales- and performance-driven role is exceptionally difficult, yet, more often than not, it is the best path to take. When you avoid selling unnecessary products and unsuitable investments, you’re protecting the client, as conflicts of interest such as these can impose a risk upon meeting client objectives. Likewise, you’re also avoiding potential FINRA investigations and ultimately protecting your career. Avoiding conflicts of interests helps to ensure that everyone wins in the end.
5. Give All Clients Equal Respect and Priority
It’s normal to give priority to the people who share a stronger bond with us. Though, in the investment business, it’s best to avoid falling prey to this tendency, even if we want to attach the label of “favorite” or “most important” to our top investors or the folks to whom we feel closest.
Giving one client priority over another or, perhaps, giving your most profitable investors exclusive access to certain investments, can lead to a downgrade in client satisfaction and blame. Giving all clients the same time and opportunities is the pathway to greater success for all involved. When clients are happy and have equal access to suitable investment opportunities, you open the door to improving your clients’ lives, strengthening the meaning of your good name, and elevating your career.
This blog is our ongoing effort to inform and educate FINRA licensed professionals about the evolving regulatory ecosystem in which we operate.