Independent Cetera team fighting Avantax ‘trade secret’ lawsuit

14:42 06 March in In the News by rafferty

March 2, 2023

A simmering legal feud between two of the largest tax-focused wealth management firms underscores the shifting challenges for independent financial advisors who switch brokerages — and the industry’s scrutiny of LinkedIn posts.

A previously-unreported lawsuit filed by the parent firm of Avantax Wealth Management cited a LinkedIn post by Brian Stern, the co-founder of Farpointe Wealth Partners, a branch that moved from Avantax to Cetera, as evidence of a “conspiracy” to recruit Avantax advisors to follow Stern to rival brokerage Cetera Financial Specialists.

The complaint, filed in December 2021, alleges that Stern, three other Farpointe executives and Cetera wrongfully used “confidential/trade secret” information as part of the effort. Court papers in the case cite a photo on Stern’s LinkedIn page depicting about 20 former Avantax advisors at Farpointe’s conference in San Antonio a month earlier. Avantax alleges that the Farpointe founders’ knowledge of its top producers is a trade secret.

Stern, Farpointe CEO Scott Rawlins, Chief Operating Officer Casey Griffin and Executive Vice President of Advisor Experience and Strategy Stephanie Schuller, as well as the Cetera Financial Group-owned brokerage and registered investment advisory firm used by Farpointe, have rejected the claims that they misappropriated trade secrets. Farpointe argued in its answer to the lawsuit that the 11 teams that moved to their branch at Cetera in Farpointe’s first year and a half after launching in November 2020 are independent advisors with the right to do so. And they said Avantax has shared the supposedly “confidential” information online.

“Far from confidential trade secret information, Avantax publicly promotes the status of its

top producers to anyone who has LinkedIn or Google,” Farpointe said in its answer to the lawsuit.

Dallas-based Blucora changed its name to that of its wealth management subsidiary Avantax after selling TaxAct, the other business that had been under its umbrella, late last year. The firm quietly filed the civil lawsuit in a Texas state court in Dallas, but the filing went unnoticed by the industry. Online legal portal Unicourt made court documents from the case available on its website. The case faces a potential trial date later this year, with the latest filing, in January, a stipulated confidentiality agreement and proposed protective order governing discovery.

Representatives for Dallas-based Avantax and Los Angeles-based Cetera declined to discuss the case, citing policies against commenting on legal matters. Reached separately via email, Stern also declined to comment on behalf of himself, Rawlins, Griffin, Schuller and their Southlake, Texas-based firm.

The case underscores an emerging trend in which independent wealth managers engage in tactics like lawsuits or outright intimidation against advisors who are 1099 contractors and leave one brokerage firm for another. In high-stakes recruiting fights for advisory teams that can sometimes spill over into legal cases or arbitration, trade secret cases are typically associated with employee brokerage firms like Edward Jones or with wirehouses whose advisors are direct W-2 staff employees.

Even without “an express set of restrictions” such as a non-solicitation agreement, independent teams that switch brokerages may find themselves hit with a legal challenge by their prior firm, said Sharron Ash, the chief litigation counsel at the Hamburger Law Firm, which isn’t involved in the case. Wealth management firms may file a lawsuit against a departed team like Farpointe in order to “scare off that firm from continuing to bring advisors over,” she said.

“What they can accomplish and what they hope to accomplish can be different things,” she added, referring to Avantax’s goals with the lawsuit. “Litigation can sometimes be used as a warning that ‘This is not a path that others should try to go down.’”

The legal fisticuffs signal a “newer phenomena in the independent channel” that extends to other firms besides Avantax, according to recruiter Jon Henschen of Henschen & Associates.

In another recent case that went to arbitration, a branch with Advisor Group’s Royal Alliance Associates prevailed over a Cambridge Investment Research broker who accused the rival network of advisory teams of violating recruiting rules.

Henschen called all of the lawsuits “just a heavy-handed measure to keep people from leaving.”

“The firms, if they’re having a lot of outflow, they pull these games on the advisors,” he added. “The bigger you are, the more likely you are to get pushback from the broker-dealers nowadays. We’re seeing more of it unfortunately.”