How firms are dealing with planners who leave, and take clients with them.

    Those advisors intent on building their firms hire staff planners to take up the slack, usually investing substantial time in training and mentoring such planners along the way. As these junior advisors mature, many will leave and take the owner's clients with them. What can you do about it?
    The commonly held belief is that the astute owner will have every hireling sign a noncompete agreement, which typically bars an employee who goes out on his own from conducting a similar business within a specified period of time within a specified geographical radius. More specific to the problem, many advisors have realized, is a nonsolicitation agreement that bypasses the question of a competing business and targets the real issue: clients. The time specification is applied to a departing staffer's restriction against contacting a client of his former employer's firm.
    As advisory firms grow larger and staff advisors are given more responsibility for the client relationship, client defection becomes a bigger and bigger problem. In more evolved firms, the owner-who may have known every client and was directly responsible for his planning in the early days-knows the firm's newer clients by name only. It's his employees who have the relationships. If they leave, many clients will want to leave with them.
    And therein lies the problem: How effective is a nonsolicitation agreement if the client really only wants to work with the departing employee? Clients will often quit the firm and solicit their advisor in his or her new location (not the other way around); hence, the nonsolicitation agreement has not been violated, but the client and the revenues he produced have left.
    There are other reasons why nonsolicitation agreements don't work. Jean Sinclair with Avenue Advisors LLC in San Diego learned them by trial and error. She says, "I had employee agreements drafted by an employment law attorney prior to hiring my first employee, but I didn't have a nonsolicitation agreement. When I had my second employee and planned to let her develop client relationships, I had my attorney draft a nonsolicitation agreement. After going around and around for a month or two, this employee declined to sign the agreement which was a [nonnegotiable] condition of employment."
    Sinclair now outsources most of the work employees did for her in the past, finding herself better protected that way. "I've hired my last two employees as independent contractors [working] on an ad hoc basis. Both have their own beginning practices now, so I essentially home-grew my own outsourcing partners and provided some income to them as new planners-a win-win situation."
    David Lewis at Resource Advisory Services Inc. in Knoxville, Tenn., applies an altogether different philosophy to the problem. Succinctly, it is, "The clients belong to the clients. They do not belong to the firm. They do not belong to the financial planner." Putting the client first, his employment terms obligate the departing employee to reach a mutual agreement with his firm as to which entity can best meet the client's needs (see sidebar). Lewis realizes that a client who wants to leave his firm to continue being served by a staff planner is probably best served by that planner anyway.
    Other advisors agree, except for one little detail-departing clients are worth something; why leave that money on the table? These veterans go through a reasoning process something like this: As we grow our firms, professional staff will grow to meet the needs of an expanding client base; staff will be given more responsibility for client relationships; many clients will bond with their advisors more than the firm; excellent advisors (we only hire the best) will eventually want their own practices independent of our firm; hence, our firm is an incubator for new advisory practices; while these maturing advisors are with us, they share in the revenue they produce and, after they've left, they provide more revenue by paying for the client relationships they take with them. In other words, if you can't beat 'em, join 'em.
    Then the question becomes not to prevent client loss, but what is the best way to structure the buyout arrangement with the staff planner? Let's look at how three different firms have approached this challenge.
    John Henry McDonald and his partner, Eric Hehman, at Austin Asset Management Co. in Austin, Texas, call their employee agreement a "buy-sell."
    "We invite our planners to leave the firm and pay us for the clients they take," says McDonald. "Because planners routinely leave with clients, we decided to encourage them to take the clients-but they must pay for them."
    "If they don't buy them, they can't solicit them," Hehman says.
    What typically differs among firms taking this tact is the payment structure. "Our contract now reads that the employee will pay two times client revenues," Hehman says, "but we also look at what FP Transitions (, the online advisory firm market maker, publishes in its annual reports, just in case the environment has changed dramatically. So, is the multiple of revenues at the owner's discretion? "We put a current rate in the agreement but also [reserve the right to] go with a new rate, so the whole thing can become a negotiating process."
    How about the payout terms? "In our one test case," says Hehman, "we made him pay 20% down with the rest over one year, because he took 15 clients and [the total amount wasn't that great]. In the current climate, it might be 10% and two years." Again, Austin's contract doesn't specify a downpayment or payoff period, it just gives the firm the discretion to finance the deal if it wants to.

    At Baltimore-Washington Financial Advisors Inc. in Columbia, Md., the attitude is, "We simply don't want to hire anyone who doesn't want a career here. It's just too time-consuming to train them," says the firm's principal, Saxon Birdsong. However, BWFA still employs a buyout arrangement not dissimilar to that of Austin. If an advisor leaves the employment of BWFA and subsequently provides any financial planning, investment or tax services to an individual who was a client of BWFA during the advisor's employment, then the advisor must pay BWFA 50% of all fees collected from the client for a period of two years.
    "Under Maryland law, we could enforce a very restrictive noncompete agreement," says Birdsong. "However, our objective is to make the employment arrangement 'sticky' but not permanently bonding. If someone joins us, we want them to think long and hard about leaving, but we also want them to have a way out if they really want to go."
    The most well-developed buyout plan this author has seen, though, is that of Cambridge Connection Inc. in Franklin, Mich., run by Bert Whitehead. Whitehead's buyout plan is part of a larger system he calls the "Cambridge Progression Plan." In a nutshell, Whitehead hires as paraplanners M.B.A.s or business degree graduates. "They understand I'm going to exploit them for five years until they're at a point where they have enough clients to start their own practice." Paraplanners rise through the ranks as senior paraplanners, then team advisors and, finally, senior advisors-each step conditioned on their obtaining additional credentials such as CFPs, CPAs, EAs or JDs.
    "Once a senior paraplanner gets a credential, like a CFP, with three years of experience, he becomes a team advisor and can handle clients on his own," explains Whitehead. "Our whole payment plan at this stage is to give the employee a percentage of the team's revenue. If he gets 40% of the revenue and the team earns $200,000, then the team advisor takes away $80,000 before expenses such as subscriptions, dues and payroll costs."
    Cambridge's buyout plan works off of this foundation. Cambridge clients are quoted a fixed fee that remains in effect for three years. Then their fee is typically raised between 15% and 50%. "At that point, they can choose to stay on the old rate with someone else as their primary advisor or pay the higher rate and keep me as their advisor," says Whitehead. "Based on that system, if an employee wants to leave, we go through and price all of his clients. He can buy us out based on the old planning fee." Whitehead's own clients tend to have net worths of $5 million to $8 million.
    Departing planners leaving with clients usually pay one year's renewal fee over five years or pay 50% of the renewal fee all at once. "The latter option is a better deal, of course, and the deal they usually take," says Whitehead. This arrangement works so well that Whitehead has earned more than $1 million in buyout fees since he began employing it. "I'm not looking at building a megafirm, and I've never had to close my practice to new clients or turn down a low-net-worth client." With the Cambridge Progression Plan, every client is taken care of-both now and later.

David J. Drucker, MBA, CFP, a financial advisor since 1981, sold his practice 20 years later to write, speak and consult with other advisors. His newest book, Tools & Techniques of Practice Management, was released by National Underwriters in December 2004. Please visit for more information.