Most registered investment advisory firms are constantly in recruiting mode.

Once they find that great “fit” in a new advisor and reach an agreement that works for both parties, it's time to break out the champagne and cigars. Or is she?

This period is often when the proverbial ball drops and the resulting problems can appear both immediately and later. Neither is good, and both can be expensive. How do we avoid these painful legal outcomes? First, you need to learn about potential problems with RIA recruiting and then the steps to take to avoid them.

Your recruit has a contract with the old firm

You're recruiting a new, hard-charging advisor who can bring in solid AUM and give you the kind of high-level client service and portfolio support you've been looking for. It has a clean record of compliance and expects no pushback from clients when asking them to transfer their business. She quits one Friday afternoon, joins your RIA, and the clients start rolling in just like she said. The only problem is that her former employer, RIA, is not so keen on this development. The employer's former attorney sends her and you a nasty letter, along with a copy of the nonsolicitation agreement she signed eight years ago when she joined the firm. They claim that she is violating her agreement and that your firm is subtly interfering with the same contract. Even though you suspected she had an agreement with them, you didn't push the issue when she said she didn't remember signing anything. Now what do you do? You call your lawyer, of course. But what could you have done to avoid this crisis altogether, or at least to get through it?

You can avoid this problem by discussing “it” with the counselor early in the recruitment process. Ignorance, in this context, is not bliss. The former employer will claim that you “knew or should have known” about the non-solicitation or non-compete agreement, so you might as well face reality. Sit down with the recruit and get a solid answer on what kind of deal he might have signed. If she no longer has a copy, it's understandable that she won't want to alert her employer by asking for one. Ultimately, this would be a huge red flag that the advisor is considering walking out the door. Instead, get as much information as you can from the advisor. Even if you don't have all the relevant information, you should at least have an understanding of what you're dealing with and can now plan. Get legal advice on the potential enforceability of the settlement and assess how you can work with counsel to weigh the legal risks of different claim approaches. In some circumstances, direct stimulation may be advisable. In others, a published notice or other less direct communication may be better. Either way, get good advice and then get on the same page with the advisor so there are no “surprises” to deal with. The key is to have the plan in place well in advance of the advisor's resignation. This is true regardless of whether the broker comes from a call office or another RIA.

You want the newly recruited advisor to sign your agreement

If you must deal with an advisor's former employment agreement, you may want her to enter into a non-solicitation agreement with you before giving her access to your existing clients. This process should be done very early in the employment relationship. Each state has its own law on the enforceability of such agreements. As a result, you don't want to download one from the Internet, use the one you had when you were in a phone office 20 years ago, or ask ChatGPT to design one for you. These agreements are enforceable only to the extent they are drafted in accordance with the laws of your state. Also, some states require additional consideration (for example, additional payments or benefits) in order to be enforceable. As a result, you may think you are protected when, in reality, you are not. Get a good non-solicitation/non-compete agreement at the start of the employment relationship. You won't regret it.

I'm sure when I shut down the new advisor giving them parity

Some RIAs offer (or require the purchase of) units in the limited liability corporation, the most common form of corporation for RIAs, to recruit advisors in hopes of “locking” them into the business. This strategy makes some sense because the LLC agreement governing the units generally contains a non-competition and non-solicitation agreement. But the real “kicker” is that the advisor is now also an owner, so anything she does to harm the business is not only a violation of the employment agreement, it's also a violation of her fiduciary agreement to the LLC. And there's another problem: she's also the owner, and no matter what else happens in the relationship, you can't get rid of her. As a result, if you go this route, you may want to be sure that the LLC agreement gives you a clear path to opting out of the equity advisor if the advisor violates her employment agreements and walks out the door with strong clients. Applying this early in the relationship will go a long way in avoiding the expense and headaches associated with litigation.

My guy in the back office only stole a third of my clients!

Remember that new kid you hired who didn't have a book of business because he would support you and work in the back office as needed? He grew up and noticed that he had unfettered access to your customers, who he interacted with frequently while you were out getting new business. He sends you an email late on a Friday afternoon while you're starting your vacation in the Bahamas. He has resigned and is now looking for half of your customers to transfer to your direct competitor. In a cold sweat, you leave your guacamole and chips at the tiki bar and pull up his personnel file on your laptop. No, there is no non-solicitation or non-compete agreement there. Why not? Well, you hired him as a back office sales assistant and promptly forgot about him. You were busy building your practice and it never occurred to you that this humble guy would have the gall to challenge you for your hard earned clientele. What should you do now? Well, your options will be limited by your state's law, but you'll probably want to have a real deal to enforce. To avoid this problem, you do not need everyone (including the factory lady) to sign an employment agreement. Instead, you should check this issue yourself every few years. Write it on your calendar so you can at least consider what real-life changes have happened in your office. Are a few people in the back office or small manufacturers getting closer to your customers? This is the time to act, not while you're desperately trying to book a return flight from the Bahamas.

Do you sense a theme here? It's easy and laudable to obsess over your consulting practice, but don't let that stop you from taking the simple legal steps necessary to protect all your hard work. It can be easier than dealing with other compliance issues and can be just as valuable.

John MacDonald is the managing partner of the Princeton office at Constangy, Brooks, Smith & Prophete, LLP. He focuses his practice on employment litigation, employment counseling, restrictive covenant litigation, FINRA securities arbitration, securities industry litigation, and supporting start-up businesses.