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Regulation and Compliance > Litigation

Ex-Edelman Advisor Sues Over Non-Solicitation Rules

By Dinah Wisenberg Brin

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What You Need to Know

  • The advisor alleges that company policies degraded his ability to serve clients.
  • One provision bars him from contacting past, present and potential clients for two years post-employment.
  • Felix Kwan also alleges that the firm breached his employment agreement.

A recently resigned Edelman Financial Engines advisor has filed suit against the firm and related entities, challenging the non-solicitation provisions in his employee contract as unenforceable.

The lawsuit, filed earlier in August in California Superior Court for Contra Costa County, also touches on shifts in custodial arrangements following Charles Schwab’s TD Ameritrade acquisition.

Felix Kwan started working at Edelman as an associate director, financial planning, in April 2012, and entered into an employment agreement with a non-solicitation provision, according to the complaint, which seeks a jury trial.

Barred from Soliciting Clients

The provision, among other points, purportedly prohibits Kwan from initiating contact with past, current or potential clients to induce them to leave the firm for two years following the end of his employment, and from accepting business from clients during that period, the suit says.

The employment contract’s non-solicitation provision is not enforceable under California laws banning non-compete and non-solicitation provisions, Kwan asserts.

 “It is well established under those laws that, in the state of California, non-solicitation provisions that are not limited solely to the protection of trade secret information are void and unenforceable,” the complaint asserts.

In January 2016, Kwan and Edelman entered into a “contribution agreement” that also contains unenforceable non-solicitation provisions, the complaint alleges.

These provisions purportedly prohibit Kwan from soliciting any clients who received services from anyone within Edelman or its subsidiaries for 15 months after his employment ends, the suit says. They also bar him from accepting any business of the same or similar nature from any client who received services from anyone within Edelman even if the client wasn’t solicited, the complaint states.

Concern Over Client Service

Kwan, who alleges that Edelman took several steps to degrade his ability to serve his clients, resigned Aug. 2, notified his clients and quickly filed the lawsuit to obtain a judicial determination on whether the restrictive covenants in the agreements are enforceable and whether Edelman can prohibit him from accepting business from former clients.

He was executive director, financial planning, when he resigned, according to his LinkedIn profile.

Kwan seeks a court order enjoining Edelman from trying to enforce the non-solicitation covenants, as well as compensatory damages and a declaration that the non-solicitation provisions amount to unenforceable non-compete rules and therefore are void and unenforceable under state law.

Kwan’s LinkedIn profile indicates he started work this month as a partner and managing director at Prime Capital Financial.

Kwan alleges that Edelman failed to provide necessary resources to properly serve clients and outlined several steps he contends that the company took, starting with an unexplained 4% total compensation cut in 2019 or 2020. 

Kwan was supported by a client service associate, or CSA, with the initials D.T., whom the suit describes as “an important part of Mr. Kwan’s team” and critical to “maintaining a high level of customer service and satisfaction.”

Last year, as part of D.T.’s professional development, Kwan sought approval from upper management at Edelman to promote D.T. from CSA to analyst. Kwan made it clear to managers that D.T. was doing an excellent job and needed to be promoted or Kwan would risk losing him to another company, the complaint states.

Kwan also told managers that he was willing to personally cover a raise for D.T., the suit contends.

Early this year, Kwan learned that Edelman was allowing only 12 advisors company-wide to hire an analyst and that he would not be allowed to do so; shortly after, Kwan learned that a different Edelman advisor was trying to hire D.T. as an analyst without Kwan’s input or involvement, the suit contends.

Kwan had a larger book of business and longer tenure with Edelman than this individual, so it’s “inexplicable” why the firm permitted that person to hire additional staff members but refused to allow Kwan to do so, according to the complaint.

A Custodian Question

Kwan’s suit also contends that this year, as a result of Charles Schwab’s TD Ameritrade acquisition, Edelman starting forcing him to transition all legacy Edelman client accounts, i.e., those who were originally serviced by Edelman Financial Services before its merger with Financial Engines in 2018, to Charles Schwab’s custodial platform.

“Mr. Kwan did not want his clients’ accounts moved to Charles Schwab’s platform because he believed it was inferior to Fidelity Investment’s platform and did not offer many of the features and services that Mr. Kwan needed to properly service his clients,” the suit contends.

Despite asserting that Kwan’s clients would be “negatively impacted,” Edelman forced him to use Schwab’s custodial platform instead of Fidelity’s, the suit says.

“This resulted in Mr. Kwan being unable to offer clients the services and products that they had become accustomed to using and having access to,” it adds.

Throughout 2024, Edelman “has continued implementing top-down policies that have degraded Mr. Kwan’s ability to properly service clients and that are not necessarily in the best interest of each individual client,” the complaint contends.

As a result of Edelman “implementing short sighted policies and various fundamental corporate changes, Mr. Kwan determined that he was unable to, without fear of violating the fiduciary duties that he owed to those clients as an investment advisor, service his clients in the manner in which those clients had become accustomed to and trusted without fear,” it says.

Even if the restrictive covenants are enforceable generally, Edelman can’t enforce them against Kwan because it committed material breaches of the agreements, including failing to properly compensate Kwan, failing to promote D.T., and failing to provide Kwan with software and services necessary to properly service clients, the suit alleges.

Edelman commented in an email to ThinkAdvisor on Friday: “We haven’t taken legal action against this former employee. That said, we remain committed to safeguarding our business while adhering to all state laws governing our planners’ operations.”

Credit: Chris Nicholls/Adobe Stock

Dinah Wisenberg Brin

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