Hiring advisors from competing firms is a well-established growth strategy across the financial services industry. Experienced advisors bring books of business, client trust, and revenue potential.
However, these benefits come with legal risk.
Claims for aiding and abetting breach of fiduciary duty, trade-secret misappropriation, and unfair competition are increasingly common and can be filed against both the departing advisor and the hiring firm. Before hiring advisors from competitors, it is important for both the transitioning advisor and the hiring firm to identify areas of risk and take steps to mitigate them. Doing so can encourage a smooth transition and help protect both parties from litigation.
Litigation Risk to the Transitioning Advisor
Three areas carry significant litigation risk for transitioning advisors: violation of their employment contract – particularly with respect to client solicitation, misappropriation of trade secrets and violation of data privacy laws (Regulation S-P) if restricted client information is moved.
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Client Solicitation
If an advisor’s employment agreement restricts them from soliciting clients, or even contacting them regarding their transition, they risk being sued for breach of contract. -
Misappropriation of Trade Secrets and IP
Advisors also face litigation risk if they retain or use proprietary or confidential information belonging to their former firm, including client lists, pricing information, investment strategies, or internal reports. Even where information is not physically transferred, former employers may allege misappropriation based on how quickly clients move or how the advisor services clients after the transition. -
Data Privacy
Advisors must adhere to Regulation S-P when moving client data and ensure that any transfer complies with rules governing the sharing of non-public personal information. Advisors may be permitted to move limited client information, such as a client’s name, address, and contact information. However, employment agreements should be reviewed carefully to confirm that no additional restrictions apply.
Advisors transitioning from one Broker Protocol member firm to another Broker Protocol member firm may be permitted to move certain client information. However, there is a higher risk of allegations if one or neither of the firms are members of the Broker Protocol.
Litigation Risk to the Hiring Firm
Advisors owe their existing employers fiduciary duty, contractual obligations, and confidentiality obligations. When any of these duties are perceived to have been violated, former employers may allege that the hiring firm was complicit in, or encouraged the misconduct, giving rise to claims for aiding and abetting.
This is a common litigation risk for hiring firms, who may be held liable if the transitioning advisor breaches their obligations to their prior employer.
What Aiding-and-Abetting Claims Focus On
Aiding-and-abetting allegations generally focus on two elements:
- Knowledge: Did the hiring firm know, or should it have known, about the advisor’s obligations to their existing employer?
- Substantial Assistance: Did the hiring firm assist or encourage the advisor in violating those obligations?
Former employers frequently allege that the hiring firm encouraged or participated in the advisor’s breach by:
- Assisting with client outreach or transition strategies
- Failing to implement controls to prevent the use of restricted client data
- Ignoring known restrictions or obligations owed by the advisor to the existing employer
- Benefiting from transferred client data or proprietary information, even if it did not directly receive the files
How to Mitigate Those Risks
While these risks cannot be eliminated entirely, firms can significantly reduce their exposure by adopting disciplined hiring and onboarding practices.
A defensible process begins before a formal offer is made. Firms should require full disclosure of all employment agreements, restrictive covenants, confidentiality obligations, and any pending or threatened disputes. These materials should be reviewed by legal and/or compliance to identify potential conflicts and ensure the firm is not encouraging conduct that could later be characterized as a breach.
Once the advisor joins, clean onboarding protocols are critical. Advisors should certify in writing that they have not retained, accessed, or used any confidential or proprietary information from their prior firm, including client lists, pricing information, or internal reports. Training should make clear that the use of such information from a prior employer is prohibited. Firms should also implement controls over system access during the transition to prevent improper data uploads.
Firms should avoid coordinated solicitation, pre-resignation outreach, or messaging that could be viewed as inducement. Client movement should be client-initiated and supported by clear documentation.
Hiring firms can provide tools for transitioning advisors to keep track of how they source client information, how client communication is initiated, when and how frequently. More documentation on client-communication can help disprove allegations brought on by the advisor’s prior firm.
Risk management efforts should extend beyond the advisor to supervisors, recruiters, and senior leadership. Aiding-and-abetting claims frequently turn on internal knowledge, and casual emails or text messages can quickly become key exhibits in litigation. Training internal teams on appropriate communications, escalation procedures, and compliance boundaries helps reduce the risk that well-intentioned conduct is later framed as substantial assistance.
Finally, firms should preserve a clear audit trail. Written policies, advisor certifications, compliance reviews, and documented approvals often determine whether claims survive early motions to dismiss. A well-documented process demonstrates good faith and places the firm in a stronger position to limit discovery and resolve disputes efficiently.
When Does the Risk of Aiding-and-Abetting Litigation Pass?
The highest litigation risk exists before the advisor’s official resignation and during the early transition period at the new firm. While firms are never entirely insulated from litigation, the risk is substantially reduced when the following conditions are met:
- No pre-resignation involvement in solicitation or planning
- Clean onboarding certifications and training have been completed
- Client movement is client-initiated, documented, and occurs post-transition
- No confidential or proprietary data is retained or used
- Internal communications reflect compliance oversight rather than encouragement
Conclusion
Hiring advisors from competitors is an essential component of growth for many RIAs and broker-dealers, but it carries litigation risk for both the transitioning advisor and the hiring firm. By prioritizing transparency, clean onboarding, careful client-transition practices, and thorough documentation, firms can significantly reduce the risk of aiding-and-abetting allegations while continuing to compete effectively for top talent.
If your firm needs assistance safeguarding its hiring practices against litigation or requires representation in connection with aiding-and-abetting allegations, please contact us at 619.298.2880 or email [email protected].
