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The Coronavirus Pandemic Presents a Unique Financial Advisor Transition Scenario

By George C. Miller of Shustak Reynolds & Partners, P.C. posted on Wednesday, March 25, 2020.

The past several weeks (which have felt like years) have turned the financial industry on its head.  The market has seen unprecedented declines, followed by unprecedented increases as Congress shored up a $2 Trillion—with a T—economic bailout package.  That staggering figure represents approximately 10% of the entire country’s annual gross domestic production.  Just one of many unprecedented steps the government, and society, have taken to curb the damage caused by the virus. 

As investors, brokerage firms, and RIA firms adjust to the “new normal” of remote work and toilet paper hoarding, the show, as they say, must go on.  More than ever, clients need advice and guidance from their financial advisors.  Financial advisors, in turn, need adequate tools and support to service their clients—including trading and product platforms, communication tools, back office support, and remote work technology.  And while it may seem counterintuitive, the temporary chaos of the “new normal” could present a unique opportunity for advisors to transition to a new firm, particularly those who were contemplating a move but had yet to pull the trigger.  Brokerage firms and RIAs, in turn, should keep a close eye on the flock. 

The reasons why are simple.  First and foremost, over the past several years, coinciding with the steady erosion of the Broker Protocol, firms have increasingly threatened or sued departing advisors for alleged misappropriation of trade secrets or violations of confidentiality clauses and sought Temporary Restraining Orders (TRO) preventing them from contacting clients.  Financial advisors are aware of the legal risks of making a move.  In California, however, state and federal courts either have closed or are offering only limited, emergency services.  The same is true in courts across the country, and FINRA’s Arbitration Division has suspended arbitration hearings through the end of April 2020, for now.  A business dispute between a financial firm and financial advisor just is not a high priority for the justice system right now. 

At the same time, financial firms are dealing with the challenges of adjusting to the new normal and may face an onslaught of customer complaints given the market volatility.  Firms may simply not be as willing or able to commit attention and resources to chasing a departed financial advisor.  Moreover, now is a time when clients are laser-focused on their investments and retirement accounts.  It is also a time when advisors should be in constant communication with their clients about their investments, rebalancing portfolios, and minimizing the risk of loss in a difficult, volatile market environment.  It is often easier to transition a client from one firm to another when the advisor has earned the client’s trust and been in close communication with the client.  There are, of course, potential downsides to a transition now, or at any time, but with courts essentially closed across the country, this is a unique situation.   

It is critical for any firm or financial advisor dealing with a transition to seek sound advice from experienced counsel.  Every registered representative or advisor contract is different, and the rules governing the type of information an advisor can—and, more importantly, cannot—take will differ depending on Broker Protocol issues, Regulation S-P and other confidentiality issues, the nature of the firm-advisor relationship, the location of the advisor and firm, etc.  There is no one-size fits all approach to transitioning a book of business while minimizing the chance of litigation or a regulatory issue (potential regulatory violations, including violations of Regulation SP are often overlooked in a transition but equally as important). 

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500. 

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