MarketCounsel launches legal hyperspace button for breakaways who get fired by Merrill Lynch (and friends) before the 'go' date

Brooke’s Note: Every once in a while an idea comes along that makes you say: Really? In this case, it’s: Will this really work and — really? — nobody thought of this before? Breaking away from a wirehouse is nothing if not a high-wire maneuver without much of a net. Now there is a pretty good net, so it appears. At least in the sense that if, as you are attempting to fire yourself from a wirehouse before they fire you first, you won’t be in a legal straitjacket for months that results in your former employer plundering your book of business as you stand helplessly by.

MarketCounsel is unveiling a means by which a broker can get into business in his or her own RIA on day one after being terminated if the wirehouse catches on to the breakaway plans and fires them first. See: Deal killers for almost-breakaway brokers.

Brian Hamburger has developed RIA Incubator Tactical Strategy over the past year in reaction to stepped-up demand for such a service. More and more brokers are finding themselves terminated by the Merrills, Morgan Stanleys and other wirehouses way in advance of the time when they are equipped to start anew as RIAs. Such premature firings can catch proto-independent firms flat-footed and make sitting ducks of their books of business because it can take six weeks or more to get registered and up and running as a going concern.

The demand for such a morning-after service has escalated in the past couple of years as wirehouses have become more sophisticated in how they bust would-be breakaways — largely by using Homeland Security-style tactics of electronic snooping. See: MarketCounsel’s MailBanc automates away some of the liability risk of instant communications.

“That’s been coming up more and more — firms are getting really good at electronic surveillance — tracking flash drives and following the number of printed pages. Any irregularity is coming to light very quickly,” Hamburger says. “We’re now prepared to receive a call from a customer at 10 a.m. and have them up and running at the end of the day.”

No ties, no links

Hamburger says he is guarding the exact mechanics of the legal ju-jitsu move he is pulling on behalf of advisors. He allows that it relates to a “piggybacking” onto an existing RIA but not at all what is called a “tuck-in” in the industry. A tuck-in involves an advisor simply joining an existing firm.

“It’s not a tuck-in. That would have been a piece of cake. That’s not a start-up. [The Incubator Tactical Strategy] has friendly RIA sponsors but with no ties and no links.”

Bean spilling

Heightening the concern exponentially is that the fact that so many breakaways are executed en masse after one individual spills the beans.

“The risk of pre-termination is greater with big teams — one team member could not show discretion. And with teams you have more meetings and [occasions to leak your intentions],” he adds.

Just ask Jim Betzig, chief operating officer of Beirne Wealth Consulting LLC, which advises $1.6 billion of assets Milford, Conn. He and his partners found themselves in hot water when Merrill Lynch caught wind of their breakaway scheduled for Feb. 20, 2012. The problem was that it was closer to Jan. 20.

“The attorney was handling the documents [relating to the team’s departure] and they came to the attention of Merrill Lynch,” he says. “Within three days, we hired Hamburger Law Firm and they were able to get us all the RIA documents in four or five days.” See: A $2 billion, 69-year-old Merrill Lynch advisor passes up the gold watch in favor of breaking away.

Brian Hamburger says that it was only by dint of “all hands on deck” and “luck” that his firm was able to right the Beirne ship in such short order. More often, the rebooting process can take several weeks or more. His plan is to take the luck out of zapping an advisory practice into RIA legitimacy in a day.

Antidote to toxic uncertainty

Tim Oden: If this works, you
will see how this will matter.

Tim Oden, senior breakaway executive for Schwab Advisor Services, says that Hamburger’s Tactical Strategy holds promise for a world of advisors who are looking to eliminate any uncertainty they can in what can feel like an uncertain transition to a new business model.

“If this works, you will see how this will matter,” he says. “To the extent to which all the providers can eliminate some uncertainty, it bodes well for an advisor to turn independent.” See: How Schwab failed to block one broker’s breakaway and what the legal battle may mean for the future.

Of course, there have been legal methods by which advisors became RIAs on day one of planned breakaways for decades. One way to do this was to have a straw man create an RIA and then sell it to you as you walk out the wirehouse door.

But this early-days circumvention or “proxy” strategy was never flawless.

“There are holes in this strategy,” Hamburger says. For instance, the straw man could gain too much leverage and hold the entity hostage. Or, often local counsel agreed to be the proxy but proved hard to find on short notice. Hamburger cites cases of {WHO?] literally parading onto golf courses with legal documents in hand to get signatures. And finding straw people can be difficult. Your friend or sibling might not want to deal with all the licensing or overstepping rules in their own workplace against having separate business interests.

Jousting with Merrill

In the case of Beirne’s Jim Betzig team breaking away from Merrill, MarketCounsel itself was able to stand in as the owner of the new entity until the advisor was prepared to leap aboard. “It’s been revolutionary and removed risks,” Hamburger says. “Other firms did not follow suit. I had Merrill Lynch lawyers say: How the heck did you do this? We don’t see any evidence there was any business activity while they were working for us.”

But now even this relatively foolproof solution has lost its applicability in a growing number of instances. The problem is that it has never been effective for state-registered firms because of questions the states ask about who is running the show. These are questions the SEC does not ask.

What turned the state-asked questions into a problem was the SEC’s offloading of RIAs with between $25 million and $100 million of AUM to state regulation.

There is little doubt that if MarketCounsel’s new methods prove effective that it will make a big difference to breakaways, according to Betzig.

“It would be a huge improvement over what’s out there,” he says.

State registration angle

Breakaways to state registration can be particularly onerous because of dealing with multiple states and their inconsistent application processes, he says. This creates the additional uncertainties relating to not knowing when they can resign. Any delay raises the risk of the firm finding out about the breakaway in advance of the scheduled parachute pull. This can allow the wirehouse to pitch clients to stay put uncontested while the RIA applicant is tied up in red tape.

Ethan Braid: The negative is that
it could attract people who would
otherwise be discouraged but now dive
in because its 'too easy.’

What Oden says may work is for sub-$100 million advisors to simply do an initial registration with the SEC. After safely making the transition, they can apply to downgrade their registration to the states.

The removal of this layer of uncertainty has real potential, according to Ethan Braid, principal of High Pass Asset Management in Denver, Colo. who broke away from UBS on Dec. 2, 2011 and now manages $55 million in his own RIA.

“This might be enough to tip the scales,” he says. “The negative is that it could attract people who would otherwise be discouraged but now dive in because it’s 'too easy.’” See: RIAs switching to state registration may be examined by a second regulator, too.

Not for every day use

Hamburger says his firm believes the new Tactical Strategy will pass regulatory muster. And he believes it is far superior to what some competing consultants offer.

“Other consultants have created shell RIAs using phony filings, only to change them upon acquisition. But, due to our reputation in the industry (e.g., the confidence of the custodians) and our relationships with regulators, we felt obligated to make sure everything was above board and would pass regulatory muster,” he wrote in an follow-up e-mail to our interview.

“At the same time, we had to respond to this calling on behalf of the independent movement that we needed to level the playing field and make it as easy to start a firm as it was to get hired at the wirehouse across the street. Each of the RIAs that we work with on these deals will naturally scrutinize the strategy before determining that they are on board in helping shepherd the next generation of financial advisors to independence.”

Hamburger declined to say what the new up-and-running procedure costs but says that the new approach will cost no more than the old ones. He says the old methods may still be used at times, but has faith the new one will largely supersede them. The new program has “several expressions of interest.”

But as excited about the new one-day strategy as Hamburger is, he allows that it has a certain manic quality.

“We’re happy not to have a fire drill every single day.”

A final thought: In interviewing Ethan Braid for this article, he raised another point that didn’t quite fit the flow of this article but seems worth pondering. Not only could Hamburger’s legal innovation be a boon to expediting the exodus of financial advisory talent to independence, he says, but it could interrupt a vital aspect of book-building in wirehouse branches. Braid, who was weaned at Morgan Stanley, says that the way many corner office brokers gain such big assets is not by being the best salesmen as much as by being the best scavengers. For example, he is practically the only advisor still in the business from the 200 people in his training class. But many of the accounts brought in by his classmates still reside at the wirehouses. Once a broker is on his way out the door, a very well-rehearsed process of locking down those accounts begins — with the deck stacked in the wirehouse’s favor because the advisor has lost his standing as an advisor. But if the advisor can get that standing right back with the Hamburger Method then it could be a different story about where those accounts end up.