How not to end an advisor partnership

When an advisor on a team decides to part ways with the other members, diplomacy and documentation are important. A recent court case demonstrates the absence of one or both factors can lead to acrimony for all parties.

A former top Manulife financial advisor lost a lawsuit in which he sought to recoup a $1.9-million departure fee in addition to $500,000 in moral and punitive damages for calls to clients that allegedly disparaged his ethics.

The advisor was hired in 2006 by a Manulife branch in Dorval, Que. In his first year, he earned $72,000. By year two, his compensation ballooned to more than $277,000, according to the ruling by Justice André Wery of the Superior Court of Quebec, released in July.

With that performance came ambition, and by 2013 he felt he’d hit a ceiling in Dorval. He decided to open his own branch in Oakville, Ont. He approached Manulife directly, bypassing the partners who ran Dorval.

“This had the effect of putting Manulife in a very tight spot,” wrote Justice Wery. “One of their best advisors in the country wanted to part ways with their best branch in Canada.”

Manulife gave him the green light, on the condition he come to a departure agreement with the Dorval branch, the court said. In August 2013, he told the partners he was leaving and departed. They agreed on the general terms immediately but executed the agreement the following January.

For nearly three years, he developed the Oakville business. Then, “without prior notice, complaints or demands,” the court said, he filed a lawsuit against the Dorval partners.

The advisor said the Dorval branch began calling his clients in August 2013, telling them he was leaving and making damaging comments about his integrity.

While the specifics were disputed, evidence showed some calls were made — though they stopped within a few hours, the court said.

The advisor’s response was to send a mass email to his clients, stating that calls had been going out saying he had been “allegedly fired” and “investing the client’s money unethically.” (The court found the calls merited $25,000 in damages, but since the suit was filed after the one-year time limit for a defamation case, none were awarded.)

Bad business for everyone

The entire scenario left John Cucchiella, president of Toronto-based SMEx Advisory, asking one question: “Why engage in that way?”

Cucchiella, who has no connection to the dispute, said: “When you start to get into that kind of diatribe, it leaves a bad smell on the firm and you as an individual.”

Secondly, you’re making clients question what type of people they’ve been dealing with. “There’s no upside to it whatsoever.”

Even if disparaging comments were made, it’s often difficult to quantify actual damages, said Jonathan Franklin, an attorney at Montreal-based Franklin & Franklin.

If an advisor were to say, “‘These people are a bunch of bums and no good and terrible and dishonest, stealing and murdering people,’ those are damageable statements,” he said.

But did the statements lead to loss of business or income? Not in the Manulife case, according to the evidence.

In 2013, the advisor had “by far his best year,” the court said — even though four of those 12 months came after he left Dorval and “during which logically he would have lost most of the clientele he argues he lost because of the calls.” And his success continued: in 2016, the advisor was Manulife’s fourth-best agent in Canada. In 2017, he was fifth.

The court ruled in favour of the Dorval partners, and ordered the advisor to pay costs of more than $108,000 because so much of the case was without merit.

Setting expectations

In any transition, there needs to be clear expectations on the roles both parties play in ensuring the best interests of the clients are served, Cucchiella said.

Joint communication from the departing and remaining advisors is ideal, explaining why the advisor is leaving, he said. The communication should also explain how clients’ needs will be met during the transition.

“Those clients still have to be looked after, so you do have an obligation to ensure that,” he said, adding that joint calls to high-profile clients are a best practice.

Regarding the departure agreement, the focus needs to be on communication and purchase price, said Stuart Rudner, an employment lawyer and founder of Rudner Law in Markham, Ont.

“For communication, who is allowed to talk to the client? What can you say? And how will you give them the choice?” Rudner said.

For purchase price, not just the amount needs to be negotiated. Though rare, Rudner has seen agreements where the amount paid from the advisor to the branch would change based on the number of clients who agreed to follow.

“It’s almost like a hold-back,” he said. “Depending on how many clients go with them, the price may go up or down.”

Cucchiella said the Dorval branch, as the advisor of record for that account, would have been responsible for looking after clients until they officially moved to Oakville.

As much as advisors might feel they own a client after spending years developing relationships, that’s simply not the regulatory reality, he said. Their know-your-client forms are not signed with the advisor, but with the dealer firm.

“Clients will [often] move with the advisor, and the good ones will retain 90 [%] plus,” he said. “But clients have three choices. They can stay, they can move to another advisor or they can follow the individual who has left.”