An ex-wirehouse broker and a regulatory lawyer divulge breakaway insights at TD Ameritrade conference

The advice at a breakaway seminar hosted by TD Ameritrade in Orlando yesterday went beyond the typical keep your mouth shut, hire a good lawyer and stick to the broker protocol.

A roomful of prospective breakaway brokers heard about the legal and emotional nuances of a wirehouse breakaway at a TD Ameritrade seminar at its national conference yesterday. The seminar, part of the pre-event activities at the custodian’s national conference, focused on how a breakaway broker can join an existing RIA.

The panel consisted of Stephanie Rossi, who represented JFS Wealth Advisors, an RIA firm located 75 minutes drive north of Pittsburgh and Ron Wyatt, an advisor she had recently recruited to her firm from a wirehouse. About 2,000 of attendees were listening online.

“You feel stale [as a wirehouse employee] and I feel alive again,” Wyatt said about his experience.

Rounding out the panel was Patrick Burns of his eponymous law firm in Beverly Hills, Calif., who was there to keep the conversation grounded in the rules of the road and to satisfy the how-to listeners.

The moderator was Jeff Zabel who heads advisor-in-transition sales for TD Ameritrade. He came to TD in 2005 after an 11-year career at Charles Schwab & Co.

Nuances

I suspect listeners came away feeling like they got their money’s worth from Burns because he offered nuances that usually don’t make their way into seminars. He spoke about the importance of understanding the law in the individual state you’re breaking away in.

In his state of California, for instance, non-solicitation and non-compete agreements are virtually unenforceable as applied to employees, he said. This means that wirehouse brokers need not worry about these contracts as barriers to breaking away. “California is at the extreme of not enforcing,” he said.

The one instance where these contracts may apply is when a departing advisor has equity in the firm. But in the wirehouse world, brokers would not be considered partners per se even if brokers have large stock ownership.

Burns advises using the broker protocol. This agreement, created in 2004, is a no-fault agreement among firms such that they can leave as long as they don’t take too much data with them or contact clients in advance.

There are 400 signatory firms on the list comprise independent advisory firms and independent broker-dealers. For details and a copy of the list of 400 firms read: Broker protocol may be endangered by by complexities as membership starts to explode

Potential mistake

One potential mistake hybrids can make with the protocol is not making certain that both of the entities where their assets will land are signatories to the legal agreement.

“It’s an all-or-nothing proposition,” Burns said. “You want your full book protected — not half your book.”

Burns say he sees some advisors who are actually too conservative in trying not to upset wirehouses.

“You can literally solicit your clients the minute you walk out the door,” he said. Imposing a “quiet period” on yourself is “bad advice.”

Mouth shut

Yet Burns strongly advises keeping your mouth shut about the wirehouse that you leave once you safely break away. Many advisors are determined to give clients more details about why they left. “I don’t see the benefit of going down that road,” he said.

Wyatt was not one of Burns’ clients but he took caution in executing his wirehouse breakaway. His process of moving to JFS spanned three years. During that time he managed to tell nobody but a close family member or two. The only other person that he gave an inkling that he would leave was one colleague at work.

But during his conversations with the colleague, he framed breaking away as something that would occur sometime down the road. “I did a very good job there,” he said. “Clients I desperately wanted to tell but they were going to be surprised either way.”

Wyatt didn’t even tell friends. He realized that they wouldn’t understand how important it was to keep the wirehouse from finding out. The friends were likely – over time— to send an e-mail or other communication that would give him away.

Rare wirehouse broker

Wyatt was the rare wirehouse broker who had 95% of his assets managed on a fee basis. The one exception was a woman with a large bond portfolio that he managed on a transactional basis.

But though Wyatt spent years looking at breaking away to a more open architecture, fee-based environment, he never seriously considered forming his own RIA.

“I didn’t want to run a business,” he said. “That would have distracted me too much. And clients would have asked: What happens if something happens to you? I’d have to say: you’ll have to find another advisor.”

This is not an issue now that he’s folded his practice into JFS, he said.

Wyatt spent some time reviewing the materials of LPL Financial and he considered accepting a recruiting bonus from other wirehouses but he decided against it. Wirehouse life was not agreeing with him.

Five hours

“I like to keep my life simple and the bureaucracy was [terrible],” he said. “It would take five hours to fill out an expense report. I’d call HR and get a recording that said: “your call is very important to us.”

After deciding to break away, Wyatt didn’t want to hazard falling into another world of bureaucracy by owning his own firm.

“If I had to do compliance and then I had to meet a client, I think my brain would be too far gone,” he said.

Patrick said that RIAs also have to be worried about breakaways bringing unnecessary headaches with them.

Here are some suggestions he gave for avoiding those problems.

Purge data

1.) Create a system to purge any data that comes on board from the clients of breakaway brokers before the breakaway is complete. Surprisingly often spreadsheet and other information comes flowing into the new firm before allowed under the broker protocol. If the data arrives early it should be purged without use, Burns explains.

2.) Ask in advance about what promissory notes that the broker may be obligated to pay. If the broker intends to leave without paying it’ll end up that he or she spends lots of time of time with the other firm. Thousands of brokers owe big bucks to wirehouses if they walk out the door. They received retention bonuses in the form of loans that are not forgiveable if they depart.

3.) The RIA should not help facilitate violation of the agreement. It could be a big time drain if the firm gets entangled then drawn into dispute proceedings.

Meanwhile, Wyatt is a meticulous person who likely would never have brought these burdens on his new RIA firm.

He even spent time rehearsing how he was going to inform clients of the switch to independence.

Negative reaction

The one rough moment came when he informed two members of a family in advance of the primary account holder and he got a negative reaction. Wyatt isn’t convinced that he’d do it differently with the benefit of hindsight but it was an unpleasant experience.

Ron expressed guilt over one other aspect of his breakaway. On the Friday night when he gave notice, the transition team from TD Ameritrade and members of his new firm, JFP, worked hard into the night.

“I felt pretty guilty,” he said. “I was tired. I went home, had a drink and went to sleep.”