Edelman Financial Engines is facing a series of lawsuits from former advisers trying to break free from what they consider “unenforceable” agreements that restrict their activities after leaving the firm.
But Edelman disputed that in a response to one of the lawsuits, accusing the adviser of “flagrant breach of contract.”
Former Edelman advisers Jennifer Staben and Tim Dowden filed their complaints in California and Texas state courts, respectively. Dowden's complaint argued that the non-solicitation and confidentiality contract he signed while working at Edelman is now being used “to discourage him and other employees from seeking employment elsewhere.”
Staben's complaint, filed earlier this month in California Superior Court, detailed how she joined Edelman in 2018 and quickly signed an agreement with confidentiality and non-solicitation restrictions. After joining, Staben helped the firm hire a full-time client service associate to help it build a book of business.
In April 2023, Edelman instituted a policy in which advisors with less than $100 million in assets under management had to use a “CSA Pool” of associates who were not full-time partners with individual advisors.
According to the complaint, Staben said the change led to a decline in customer service and her work suffered, with Edelman scaling back her compensation in 2023. She decided to leave Edelman, resigning on February 16, 2024.
But Edelman informed him that most of the stipulations in the covenant were still enforceable, leaving Stabe (and others in similar situations) in a “dilemma,” according to the complaint.
“They can either comply with overbroad and illegal restrictive covenants to avoid being sued, but, in doing so, risk breaching the fiduciary duty owed to their clients, or seek to challenge overbroad restrictive covenants at risk of being sued in order to fully comply with the fiduciary duty they owe to their clients.”
Dowden faced such a dilemma when he decided to leave Edelman, according to his lawsuit filed in Texas District Court on Jan. 12.
After Dowden joined Edelman in December 2019, he also signed an employee agreement, according to the complaint. While Dowden claims Edelman promised him about 50% of the top clients in the Dallas area, the flow of clients increased to 20% “without notice or justification,” affecting Dowden's compensation, bonuses and stock earnings.
Dowden, who managed $154 million for 280 clients at Edelman, said he felt “stuck” in the situation, arguing that the perceived scope of the covenants turned him off. According to Edelman's reading of the contract, Dowden was restrained from committing the clients he served. and those he “even provided information to” in the previous two years, according to the lawsuit.
In the complaint, Dowden noted that the agreements limited him from communicating with clients to tell them of his departure during the four-week notice period of his resignation, nor from announcing his departure “on a public platform.” For Dowden, this was against the CFP Board's Code of Ethics (Dowden had a CFP certificate).
Specifically, he cited the CFP's mandate that certificate holders have an obligation to provide clients with “any information that is a material change” or that could cause a client to continue doing business with that adviser or their firm. Counsel believed that his resignation from Edelman was easily qualified as material.
“As a financial advisor, Mr. Dowden owes an independent duty to his clients as their fiduciary to notify them of informational material about the advisory relationship, particularly the notice of his resignation from (Edelman) and his change of work,” the complaint said. .
The CFP board declined to comment “in connection with pending litigation.” When asked whether the board considered covenants restricting advisers from contacting clients for a period of time to conflict with the mandates of the CFP Code of Ethics, regardless of this case, the board again declined to comment.
both Dowden AND ROD have taken new jobs with the same firm, Prime Capital Investment Advisors, according to SEC filings shown in their IAPD profiles. Both advisors have already appeared in Prime Capital's list of advisors on its website.
Staben is represented in court by Michael Seitz, while Dowden is represented by Mavish Bana and Scott Seifert. All three attorneys work at Spencer Fane, a Kansas City-based law firm that often provides legal services to Prime Capital.
Attorneys for Staben and Dowden did not respond to requests for comment before publication, nor did representatives for Premier Capital Investment Advisors.
The second fits Edelman's alleged tactics at play when an adviser leaves, including immediately shutting down all phone and email addresses to prevent them from communicating with clients. Staben also accused Edelman of failing to tell previous clients where he had gone to work, even if the firm knew and clients asked (Dowden echoed this in his complaint).
For Dowden, these alleged “draconian employment arrangements” resulted from a period of intense mergers and acquisitions funded by a lot of private equity over several years. Dowden believed these infusions of PE money left Edelman executives fixated on growing the firm's assets under management “at all costs,” according to the complaint.
“As part of achieving this goal, Edelman Financial Engines executives are motivated to ensure, by all means necessary, that clients served by a departing financial advisor do not follow their preferred advisor to another firm, ” said the complaint.
Edelman declined to comment, but said it will continue to “defend itself against the claims in these lawsuits.”
That defense is illustrated in more detail in a response Edelman filed against Dowden's allegations last Friday. In the counterclaim, Edelman accused Dowden of “flagrant breach of contract.”
According to Edelman, Dowden began working for Prime Capital before resigning from Edelman. Dowden allegedly recreated a list of Edelman clients he had previously served “on behalf of or for the benefit of” his new employers at Prime Capital, and in doing so, broke the covenants he had agreed to at Edelman.
“This information identifying individuals as having significant investable assets and the ability to make future investments is not publicly available and constitutes one of (Edelman's) most valuable trade secrets,” the counterclaim said. “(Dowden) used and disclosed this information to Prime Capital without permission and in violation of the agreements.”
Both Staben and Dowden argue that Edelman will pursue the former advisers in court to ensure compliance with the covenants, a process currently playing out in a recent legal back-and-forth. between the firm and Mariner Wealth Advisors.
Edelman accused the RIA of encouraging advisers to break their non-solicitation and confidentiality agreements after they moved to Mariner, alleging the firm engaged in a “calculated campaign” to steal Edelman's business. Mariner countered by accusing Edelman of using the courts to a years-long effort to stifle fair competition within the industry. Edelman is also in arbitration with several advisers who left the firm for Mariner.
But Edelman isn't the only firm dealing with former advisers seeking to break what they consider unfair covenants. Hightower is being sued in California federal court by Darren Reinig, a former adviser who claims restrictions in his contract make it untenable to continue in the wealth management space.
Reinig claims he was a founding partner of Delphi Private Advisors, which Hightower bought in 2019 and merged with another California-based firm. But a few years later, he decided to leave and this month registered a new RIA with the Securities and Exchange Commission. Like Staben and Dowden, Reinig signed a contract that included confidentiality, non-compete and non-solicitation mandates when he started working at Hightower.
Reinig alleged that the agreement required him to enter into any business in which “Hightower (or any affiliate of Hightower) may engage or may engage in the indefinite future.”
According to Reinig, Hightower argued that he is not allowed to contact any “Hightower customers,” which can span as many as 138 different businesses in 34 states (as well as the vendors, employees and contractors of those businesses).
“Hightower's position limits potential customers' ability to do business with individuals of their choosing and makes it impossible for Reinig and/or third parties to discern if, who, when, with whom, and if they may engage in conduct without bumping into Hightower. alleged contractual restrictions,” the complaint said.
Hightower declined to comment, citing a policy not to discuss pending litigation.
Despite these cases, Brian Hamburger, CEO of MarkerCounsel and the Hamburger Law Firm, said his practice isn't seeing any increase in these types of cases compared to the past, and he thinks there are many aspects to an adviser's relationship with the former firm. theirs that would have to be examined before going to the judicial process. Max Schatzow, a partner with RIA Lawyers, said WealthManagement.com that anecdotally he had seen an increase in these types of claims and suspected it was largely due to the growth in space.
“There are a lot more aggregators and large VNRs today than there were years ago,” he said. “These businesses have more executives and employees subject to non-competes and non-solicitations. I think most wire companies and their employees are subject to mandatory arbitration before FINRA to resolve these types of claims.”