CBIZ Financial Solutions wanted more than a million dollars from one of its former advisors for poaching clients. Instead, it got a dollar in damages.
In a May 2020 arbitration claim it made with the Financial Industry Regulatory Authority (Finra), CBIZ said its former employee, Timothy Michael Schannep, ran afoul of a non-solicitation agreement for contacting the firm’s broker-dealer clients. Schannep had been with CBIZ, a diversified financial services firm, for 15 years but left in 2020 to form his own Tucson, Ariz., firm called Retirement Wealth Partners LLC, which affiliates with Commonwealth Financial Network.
CBIZ said Schannep breached a 2006 confidentiality and non-solicitation agreement and sought compensatory damages of $1,012,350.95. Instead, Finra gave CBIZ a dollar, saying the non-solicitations of the employment agreement were overly broad.
It’s not all rosy for Schannep, however: He’s still on the hook for more than $125,000 in attorney’s fees according to the agreement, the arbitration panel said.
Neither CBIZ nor Schannep returned calls from Financial Advisor seeking comment. But the decision raises questions about how reasonable non-solicitation contracts are when advisors are looking for greener pastures at new firms.
That question became even more crucial in 2017 when wirehouse firms Morgan Stanley and UBS famously left the “broker protocol”—an agreement to let advisors more easily float among firms without extensive litigation. Both firms have recently pursued lawsuits against big producers who left them.
Jodie Papike, a recruiter for the broker-dealer industry with Cross-Search in Encinitas, Calif., isn’t familiar with the details of the CBIZ claim, but she says that advisors who come to her are always negotiating a tricky path when hoping to move their business to a new broker-dealer. The nuances of the non-compete contract they sign with their former firms are important, she says—specifically when a firm says you can’t even communicate with its clients, much less solicit them.
That bit barring outright communication might be too much for a judge or arbitrators to swallow, she said.
“That’s the most extreme contract,” Papike said. “A lot of the time, the contracts that are overly broad say you can’t have communication with your clients, which is difficult to enforce, especially if the clients reach out to you. If the client reaches out to their advisor and says, ‘Hey, you’re gone. What are you doing? I want to follow you,’ it’s rare that any judge is going to block that client from going with you.”
It also depends on the state. California law generally makes non-compete language more difficult to enforce, said Craig Zafis, a Finra arbitration attorney based in Escondido.