The Big Mistake That Leaves Advisors Open to Lawsuits

The Broker Protocol

Schatzow and Dennis Concilla, a lawyer at Carlile Patchen & Murphy, where he heads the firm's Securities Litigation and Regulation Practice Group, both pointed out that the Broker Protocol was designed to provide advisors more freedom, but not every firm is a member of it. If you're not a member of the Broker Protocol, it can't be used as a defense by you if a case goes to trial, they said.

Carlile Patchen & Murphy's website features a Broker Protocol search engine. Hightower was listed as a member of the Protocol, according to a search, while Policar and NGP were not. However, Hightower left the Protocol in 2019, a company spokesperson told ThinkAdvisor on Tuesday.

The Protocol was intended to decrease the number of legal disputes just like this one, Concilla told ThinkAdvisor. It has achieved that but there are still many cases like this anyway, he noted.

In essence, the Protocol says, "if you promise not to do certain things [and/or] you only do certain things, regardless of what your contract says, we're not going to sue you," Concilla explained, adding advisors can join the Protocol in addition to brokers; in fact, most members are now advisory firms.

If an advisor or broker backs up a truck to the firm's office back door and takes all the clients' documents, like in a case he had several years ago, "that's going to be illegal" regardless of what the contract says, with or without the Protocol, Concilla said. "Every company has a right to protect its property," he said.

Isn't It Ironic?

Recruiter Jon Henschen, president of Henschen & Associates, says he has discussed the Hightower case with other recruiters.

"We all agreed that this advisor likely skimmed over the contract, which is very common," he told ThinkAdvisor. "Advisors will think, this is the last place I'm moving to, so they simply skim over the contract and not look at the details."

In cases like this, therefore, it's the advisor or broker who is at fault, he said.

However, "the irony of this of course is wirehouse representatives join a firm like Hightower," which previously targeted wirehouse reps, "to gain greater freedoms in how they operate their business yet we see Hightower incorporating similar tactics to the firms their advisors left, wirehouses," he told ThinkAdvisor.

Henschen argued it's possible that "Hightower will cripple their recruiting efforts going forward because trying to sell an environment of business confinement is a tough sell."

After all, "our industry is a small world and word gets around quickly with unintended consequences to those that try to impose limits on advisors independence," he said. "Freedom, as in much of life, always attracts, while those that impose constraints on freedom eventually lose their audience."

But, "instead of mandating rules or regulations on such matters, I prefer the free markets to let the best ways to operate a business rise to the top," he said. "Let RIAs and broker-dealers do as they wish, such as Hightower hindering their advisors' ability to leave, and let them experience the repercussions."

A LinkedIn Loophole?

This issue is "why every financial advisor should make sure that they're connected to their clients on LinkedIn," Crystal Thies, a LinkedIn trainer, said recently on LinkedIn, in response to comments made by Penny Phillips, president and co-founder of Journey Strategic Wealth. Thies argued this would serve as a loophole for advisors.

But Concilla laughed at that argument, saying it may serve as a loophole in some cases, but "it's not all that effective either." For one thing, many people, like him, don't like using LinkedIn (even when they are, like him, a member of the social network).

In many cases, companies have sued over this, alleging it was the equivalent of solicitation, he said.

Also, an advisor's LinkedIn account and email are often controlled by the firm they are working for and can no longer be used after the advisor has left the company, he added.

(Pictured: Brian Hamburger)