Advisor Group branch manager prevails in messy recruiting dispute

15:01 10 February in In the News by rafferty

February 8, 2023

A FINRA arbitration case showing the tensions between independent branches about recruiting moves and M&A deals ended in a victory for one of the largest enterprises at Advisor Group.

In a Jan. 23 ruling by an Oklahoma City-based panel, arbitrators rejected Cambridge Investment Research financial advisor Alan P. Niemann’s demand for $1.2 million in compensatory damages for unjust enrichment and violations of company recruiting rules by Royal Alliance Associates branch manager Brian B. Heapps. The dispute involved Niemann’s claim that Heapps owed him compensation for three advisors who went to Heapps’ branch, Innovative Financial Group.

Nieman and Heaps both headed offices of supervisory jurisdiction for Royal Alliance when Niemann decided to join Cambridge in 2020. Upon his exit, Niemann had hoped that advisors who retained his services as head of an OSJ branch would make the move with him. But three decided to take their business to the branch led by Heapps.

Independent branches often affiliate with offices of supervisory jurisdiction, which are essentially branch offices handling regulatory and compliance issues, as well as additional areas such as marketing, technology, leads and discounted investment products. Independent financial advisors choose between being supervised by their brokerage’s corporate office or going to a branch. Aligning with an OSJ can offer access to a branch’s services and a smaller community within a large firm, even though advisors often have to pay extra for the arrangement.

Niemann claimed that Heapps violated Royal Alliance’s guidelines about recruiting another branch’s advisors, as stated in a presentation slide at a conference, and therefore needed to pay for the lost business.

Niemann’s efforts for most of the past three years to gain restitution for the losses to his branch have come up empty. In the process of filing an arbitration claim and an earlier court case that never went to trial, though, he shed more light on the messiness beneath the surface of many industry recruiting transitions among the largest independent wealth management firms. In addition, the case demonstrates the complexity and importance of independent branches to firms like Advisor Group, Cambridge and rivals LPL Financial and Cetera Financial Group.

“This case does not present a situation in which a crafty managing supervisor unscrupulously lures away successful brokers not actively looking to move, and their books of business, into a competing firm with promises to the brokers of greener pastures at the new firm, and then expects such a disruptive raid not to have adverse financial consequences,” the arbitrators wrote in a highly detailed ruling on the case.

The move by Niemann to Cambridge “made it impossible” for the three advisors to stay in the same position they held since joining the OSJ in 2013, the arbitrators said, noting the possible ramifications of allowing Niemann to collect restitution for the business he lost in their move.

“When productive brokers, who have built up good working relationships with their customers over the years, have the door closed on them at their place of work but wish to continue working in the industry, they should be able to do so without imposing a huge financial obligation on their new boss.”

Advisor Group praises decision

Niemann and his attorneys didn’t respond to emails sent to their law office and his current practice, Oklahoma City-based Adaptation Financial. Representatives for Cambridge declined to comment, citing a policy against commenting on litigation. While Niemann lost the arbitration case, he could still try to have the decision thrown out through another court case.

The arbitration decision was “gratifying for both Mr. Heapps and the others collaterally impacted by [the] claimant’s allegations,” attorney Spencer Smith of McAfee & Taft said in an email. “There was no question that the underlying business in question belonged to the advisors, who were very pleased with Royal Alliance and did not want to go along with a transition — orchestrated by the claimant (their OSJ) — to another broker-dealer.”

He added that the ruling “recognized the free affiliation rights of the advisors” to stay with Royal Alliance but move to a new OSJ, which he called “a firm with which their clients are well-served and where the advisors are very successful.”

Advisor Group is “pleased with the outcome of this arbitration as we believe it accurately reflects the facts of the situation,” spokeswoman Jen Roche said in an email. “Brian continues to play an important role in the growth of our large enterprise practices.”

The ruling contrasts with a broker “raiding” case that led to an arbitration award of nearly $20 million last week and most FINRA panel decisions that omit key details of the underlying disputes. The parties in Niemann’s case against Heapps requested an “explained” or “reasoned” decision that provides the rationale for their ruling in a manner that’s more similar to a judge’s opinion in court.

In one other novel aspect of the case, the parties all had previous tenures with Signator Investors, a brokerage that Heapps once led as the president of its parent company before Royal Alliance acquired the firm from John Hancock in 2018.

Heapps later launched GenXFinancial, which owns the OSJ spanning 100 advisors and $4 billion in client assets and other businesses called MyRemoteFA and SellMyFinancialPractice. Innovative Financial, his OSJ, “did not recruit” the three advisors from Niemann’s firm, according to the ruling, which identifies the planners by their initials only and says they made the “initial contact” with Heapps about joining his branch.

There is always “a lot of politics” involved with the relations between OSJs and their brokerages, according to recruiter Jon Henschen of Henschen & Associates.

“It’s ultimately the advisor’s choice whether they want to stay or go,” Henschen said. “If a rep’s not happy, you are free and clear to do whatever. Some of these OSJs can be rather controlling in not wanting their advisors to be able to go to other OSJs within a broker-dealer.”

Lingering questions

The reasons for Niemann’s decision to go to Cambridge in 2020 and the circumstances of the advisors going to his OSJ in the first place aren’t entirely clear. Their practice had changed hands in an M&A deal, which adds another layer of complication to the case.