Financial Firms Revisiting Approach to Restrictive Covenants

Kollman & Saucier
Kollman & Saucier

Many business owners utilize some forms of restrictive covenants when hiring employees.  Whether it is to protect trade secrets or customer lists, or to ensure that sensitive information remains confidential, employees routinely execute agreements barring them from competing with their former employer, soliciting their former employer’s clients, or taking certain information with them when they leave.

While the enforcement of these covenants varies across jurisdictions, financial advisors and wealth management firms chose in the past to take a different tact.  Instead of trying to restrict wealth managers from taking their clients with them when they moved to new firms, these firms instead voluntarily joined the Broker Protocol, which permitted wealth managers to take certain client information with them when they left and allowed managers to solicit their clients to join them at their new firms.  Wealth management firms believed that competition for the managers, and their clients, was a good thing.

The good times may be coming to an end.  A recent article in the New York Times noted that Morgan Stanley, UBS and Citibank withdrew from the Broker Protocol last year.  If other brokerages, especially the larger ones, follow suit, clients may see their advisors subject to increased restrictions upon departing.  This usually means one thing: litigation.  While post-employment restrictions are subject to various levels of enforcement, the threat of litigation, and its attendant costs, will surely chill the liberal movement of wealth managers from one firm to another.

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