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If You Must Fire an Advisor, Do It Right

By Joan Warner January 6, 2014

No one relishes having to fire a subordinate. And in the financial-advice business — by nature a “people” profession — the task comes with particular challenges. A manager who has to let an advisor go must think about the consequences for clients, team members and the whole chemistry of the practice, not just the person receiving the bad news.

“It’s painful for everybody concerned,” says Frank Armstrong, founder and CEO of Investor Solutions in Miami. Although he says his firm, which has $700 million under management, doesn’t suffer from a lot of turnover, he has been running it long enough to have learned some lessons from hard experience.

Things are straightforward if an advisor has acted dishonestly or been indiscreet with client information, Armstrong says — behaviors for which he has zero tolerance. He adds that an employee handbook spelling out what’s “beyond the pale” will simplify both the firing decision and the conversation. Guidelines should distinguish clearly between misconduct and errors made in good faith. “I’ve had advisors make mistakes that cost me $50,000 or $100,000,” says Armstrong; he ate the expenses and saw no cause for dismissal.

Trickier are situations where hard-working, well-meaning advisors don’t meet expectations. A firm might hire an FA to be a rainmaker, but the assets just aren’t coming in. Or a reputed financial-planning whiz isn’t helping clients meet their goals. Such employees typically know when they’re not doing well, says Armstrong, especially if managers have been doing their own jobs properly by documenting performance on an ongoing basis.

He recommends giving such advisors the opportunity to resign. “Everybody’s better off if they move on to something else,” says Armstrong. “They can see they’re on a path to failure.” For the firm, there are distinct benefits to avoiding a forced termination. “If they resign,” says Armstrong, “it’s less likely to result in litigation, and it doesn’t count against my unemployment bill.”

Frank Armstrong

Managers firing an advisor for cause can address legal risk by getting the firm’s attorney involved if the employee has recently complained about compliance, harassment or discrimination, says Melissa Goodman, a partner with law firm Haynes and Boone in Dallas whose clients include Bank of America and Morgan Stanley. A script is helpful for keeping the meeting short and civil. “Don’t debate the issue,” Goodman advises. The manager should convey that the decision has been made, not that “you might change your mind,” she says.

What about the advisor’s clients? Whatever the circumstances of the firing, a firm’s best chance of hanging on to them is to reach out immediately, says Michael Branham of Cornerstone Wealth Advisors in Edina, Minn., which has $160 million under management. After telling clients, So-and-so is no longer with us and has gone on to pursue other opportunities, let them know that other advisors at the firm are knowledgeable about their financial plan and want to help them stay on track. “Have them come in to talk, and show them what they have to gain by staying put,” says Branham. Waiting until clients call to ask for the fired advisor is a bad idea, he adds. “Be proactive.”

That conversation will go most smoothly in situations where the firm, not the advisor, “owns” the client relationship. At Cornerstone, according to Branham, “we have two to three people at every meeting with every client. If, God forbid, something terrible happens, multiple people have familiarity with each situation.” Ideally, he says, clients should feel comfortable calling firm principals, paraplanners and anybody in between.

Applying the Protocol

The Protocol for Broker Recruiting is ambiguous about advisors who get fired. It refers only to “departing” brokers, making no distinction between those who leave a firm of their own volition and those who don’t. Dennis Concilla, an attorney with Carlile Patchen & Murphy in Columbus, Ohio, has successfully claimed protocol protection for fired FAs more than once.

“What gets interesting is that if a broker is terminated, he doesn’t have time to plan,” says Concilla. Unlike someone who switches voluntarily from one protocol firm to another, a fired advisor might have to rely on memory — or a Christmas card list at home — to recreate a document with client names and contact info. But “I have sent that to the old firm” of a fired broker, says Concilla, “and said, ‘Here’s our list; we’re claiming protection under the protocol.’ No broker-dealer has ever said to me, ‘No, we don’t think you’re covered.’” In fact, Concilla recalls demanding — and getting — a protocol list from a wirehouse that fired a broker.

However, putting himself in the manager’s shoes, he says, “If I terminated [an advisor] for cause, I’d think long and hard before giving him a client list.”