Think Before You Follow Your Financial Advisor to a New Firm

It seems as though increasing numbers of financial advisors are leaving big Wall Street firms to go to smaller local or regional firms. Some departing advisors also start their own registered investment advisory firms. The question is, should you follow your advisor to the new firm or stay with your advisor’s old firm?

Advisors typically claim they are making the move to benefit their clients -- with the hope of maximizing the number of clients who follow them to their new firms. But such a boast may or may not be true.

You might be better off following your advisor if the new firm provides superior services and results. However, the move could be counterproductive if your advisor's sole motivation is to make more money.

So how do you know? Following are a few tips that will help you make your decision to stay or go.

Protocol: In 2004, several major brokerage firms joined together and created the Protocol for Broker Recruiting, which established ground rules for broker recruitment and solicitation. Since then, some 500 (including most of the largest ones) have signed onto this Protocol, which allows advisors to move between participating firms without threat of lawsuits or arbitration. But there are thousands of smaller firms that do not participate in the Protocol.

At issue is who owns the relationship with you and the associated revenue it generates. In many cases, both financial advisors and the firms for which they work may believe they own the relationship. This conflict can directly affect you if an old firm, for instance, obtains a restraining order that limits your advisor’s ability to contact you and move your assets to the new firm.

Action/Winner: Ask your financial advisor if his new firm subscribes to the Protocol. If the answer is no, ask about legal issues that could affect your ability to move your assets to the advisor’s new firm. You win if you choose to move your assets and there are no legal restrictions on your advisor.

Bonus money: Advisors are often paid very large sums of money to change firms. The more revenue the advisor produces, the bigger the bonus. For example, an advisor who produces $1 million of revenue may receive a bonus that is greater than $1 million for changing firms. Therefore, the advisor is highly motivated to retain you as a client.

You may see a pattern of job changes if you research the work history of advisors. For example, a given advisor may change jobs every five years. That is because advisors usually have to stay at a new firm a minimum of five years to earn 100% of the promised bonus.

Action/Winner: Ask your advisor to document his bonus money in writing and the length of time he is contractually obligated to stay at the new firm. The advisor wins if your revenue helps him earn a bigger bonus -- and you win if he is transparent about the deal.

Payouts: Some advisors change firms to increase their payouts when they sell investment and insurance products. For example, advisors may earn payouts of 50% of the commissions they produce when they sell mutual funds and other products at large Wall Street firms. But payouts at a smaller firm might be 80% or even 90%. So the bottom line is that the same amount of work produces 60% to 80% more income for the advisor.

Action/Winner: Ask your advisor to document his old and new payout rates in writing. The advisor wins if his payouts increase, and you win by understanding his commission structure.

Investment Choices: Most big firms limit what their brokers can sell you. For example, they may limit advisors to selling company products and third-party products that appear on an approved list. Third parties, such as mutual fund families, pay big fees to be included on approved lists.

Action/Winner: Ask the advisor to document in writing any restrictions at his new firm that limit your investment choices to particular products. You win if you have freedom of choice to invest in the best products. You lose if you are limited to company products or products from a limited number of third parties.

Assignment: If you decide to stay at the advisor’s old firm, you will be assigned to another broker. If you are a more substantial investor, you can expect your business to be transferred to a more senior advisor. If you represent less revenue to the firm, then you will likely be assigned to a newer, less experienced advisor.

Do not be surprised if the new advisor speaks poorly about your previous advisor. Just because the old firm does not sue your advisor doesn’t mean the firm won’t fight to retain your business. In most cases, the old firm’s only shot is to undermine your relationship with the departing advisor.

Action/Winner: Interview the replacement advisor as you would any new advisor. Make your decision to stay or go after reviewing the advisor’s credentials, ethics, and business practices. You only win if you feel your new advisor is competent and trustworthy and makes you feel comfortable about your investment decisions.

— Jack Waymire spent 28 years in the financial services industry, and for 21 of those years, he was the president of a registered investment advisory firm. He left the industry in 2004 for a career as an author and blogger. You can reach him at Jack@InvestorWatchdog.com.