This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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In a recent article, I opined on the upper hand that broker/dealers have when terminating their brokers. The terms of those departures, as reflected in the disclosure documents, is similarly imbalanced.
For good reason, broker/dealers must explain when a broker leaves their firm for reasons less than voluntarily. That information can be useful to regulators, future possible landing spots for the broker, and the investing public.
The verbiage provided, often as short as a single sentence, is scrutinized by a broker/dealer before finalizing. It is responsible for fulfilling its regulatory obligations to provide an explanation while being cognizant that the verbiage could lead to litigation.
Most broker/dealers work to fulfill their responsibility ethically and fairly. But I’ve seen several instances where that hasn’t been so certain:
- A broker who leaves “voluntarily” only to find their U5 marked with reference they left while under internal review relating to an issue they were long under the impression was resolved without concern.
- A broker who leaves “voluntarily” to pursue an independent path, only to be dinged with arbitrary allegations of misconduct, mysteriously (conveniently?) tied to the timing of their departure.
- A broker whose departure is involuntary, yet the verbiage provided is far excessive for the circumstances of the termination.
For the broker, the disclosure often becomes part of their public BrokerCheck record. Current and prospective clients can view verbiage they might not fully comprehend or improperly recognize as nefarious.
A broker may also have trouble finding another broker/dealer to affiliate with due to concerns over the U5 language. Any delay further complicates the broker’s efforts to salvage their book of clients and bring them to a new firm.
Sometimes brokers have been able to have contested U5 language retroactively revised or expunged from their record.
The latter typically comes at the cost of tens of thousands of dollars in legal fees and years of effort, all with no guarantee of success. Even with a positive outcome, the broker has typically endured years of being publicly guilty until proven innocent. Their career trajectory was permanently altered.
Consider the impact U5 language has on the broker/dealer producing it.
Unless there is an obvious pattern of misconduct, regulators are unlikely to penalize a broker/dealer for what the firm proclaims was its best effort at fulling its regulatory disclosure requirements.
Even if/when a broker sues the broker/dealer over the language used, the potential legal exposure is absorbed as a cost of doing business.
What could be career-threatening, if not ending, for a broker is inconsequential to a broker/dealer.
I am not defending the brokers appropriately excommunicated for indefensible acts. Nor do I want to give the impression all broker/dealers are out to harm brokers.
But it’s worth appreciating the uneven playing field between broker/dealer and broker. You are at their mercy if you are with a broker/dealer firm. A single sentence could unwind years if not decades of your career.
To repeat a warning from my column on broker terminations…. Are you the captain of your ship, or could you walk the plank of another?
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.
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