This content is from: Practice Management

Firms Increasingly Show Their Fangs, Borrowing from the Brokerage Legal Playbook

An advisor allegedly stole proprietary information from Mercer Advisors. The firm says it doesn’t just own the data – it owns the clients.

RIAs are following in the footsteps of brokerages and could be more litigious against advisors in the future.

A lawsuit filed last week by Mercer Global Advisors against a former employee is the latest example. In the complaint filed Aug. 8, Mercer alleges that Skyler Kraemer, a former advisor employed by the $16 billion national RIA, took Mercer's “confidential and proprietary client information” and is in violation of his employment agreement with the firm. 

“What’s old is new again,” said Sharron Ash, the chief litigation counsel at Hamburger Law Firm. “This is spilling into the RIA space. The same concepts that you see asserted by any of the large wirehouses. If you want to know what's coming in the future, look in the past.” 

Kraemer’s new employer, Santa Barbara, Calif.-based Mission Wealth Management, an RIA that manages $2.3 billion, was also listed as a defendant. Kraemer registered with the firm Aug. 5, according to his public employment history filed with regulators. Mercer stated in the complaint it believes Kraemer was hired to lead Mission’s first office in New York City.

Civil suits with similar allegations against advisors are filed routinely if a wealth manager thinks they have merit, according to Ash. More stringent privacy laws have made the legal transfer of information more onerous, creating more opportunities for advisors to err and become litigation targets, Ash said. Wealth managers don’t frivolously spend the time and money necessary to file such cases, she said.

Mercer Advisors also is not a member of the so-called protocol for broker recruiting, an agreement that limits litigation amongst member firms through set of rules regarding advisors leaving and joining another company.

But Mercer’s complaint is atypical because in addition to arguing that Kraemer took data that didn’t belong to him, the complaint asserts that he could use it to take clients that belong to the firm. Kraemer’s employment contract forbids him from soliciting any of Mercer's "past, present, or potential client for a period of 12 months following his separation from Mercer."

“Mercer dedicates tens of millions of dollars in time and resources to developing and maintaining existing and prospective client relationships. Indeed, unlike many other investment management firms, Mercer does not require its advisors to originate clients or develop their own books of business. Rather, Mercer has discrete marketing and sales departments that are responsible for developing new business,” according to the complaint.

The RIA claims those central sales and marketing efforts deliver 600 to 900 new clients to its advisors every year. It is the advisors' duty to service those clients, it says. 

“Kraemer had no involvement with any of the clients he interacted with while at Mercer prior to joining Mercer, and had no responsibility for winning their business. Instead, Mercer's clients were assigned to Kraemer,” the complaint argues.

Other attorneys recognized in the complaint the longtime debate over who clients really belong to. Scott Matasar, a partner at Matasar Jacobs, counsels well over 100 advisors or teams on transitions to other firms every year.

“This is just, again, to me, the increasing trend of firms being increasingly territorial and aggressive in protecting their financial interests,” Matasar said.

Neither Kraemer or Mission Wealth Management has filed an answer to the complaint as of Wednesday afternoon. They could not be reached to comment on the case, filed the New York County Supreme Court in New York. Mercer declined to comment about the complaint.

David Gehn, a securities attorney at Ellenoff Grossman & Schole in New York City, said it “almost is incumbent of the firm to be aggressive” if it believes a confidentiality agreement was broken and to protect the business. Otherwise, advisors would join, build relationships with the clients given to them, then leave Rolodex-in-hand.

It would be unusual for a firm not to expect an advisor to bring in clients on their own, said Richard Schulman, a partner and member of the Litigation and Arbitration Practice Group at Duval & Stachenfeld, a law firm in New York City.

But Schulman didn’t discount Mercer’s argument that the company was helping advisors drum up business. Two weekends ago, a banker at a Chase branch told Schulman he could help him earn more with the money in his savings account. Before he knew it, Schulman was whisked over to a J.P Morgan advisor at the branch.

“What constitutes the development or ownership of a client relationship in this type of dispute? Is it merely the intake/sign up of the client or the relationship-building and servicing of the client?” Louis Tambaro, a partner at Jardim, Meisner & Susser, asked in an email.



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