Serving as a registered investment advisor (RIA) is a very challenging but rewarding position. Someone can help manage other people’s finances to help them achieve certain goals, such as generating a certain amount of investment income to prepare for retirement. Obviously, someone with access to and control over another person’s financial resources could misuse their position for personal gain. Their conduct could lead to major financial losses for other people.
Therefore, the law imposes a very high standard of professional duty on RIAs. Specifically, investment advisors generally have a fiduciary duty to their clients. A fiduciary duty is the highest degree of responsibility possible under existing laws. Someone with a fiduciary duty to another party has to put their best interests above their own wishes and preferences.
Sometimes, professionals managing financial accounts and investments aspires to leave their current employment arrangements and start their own breakaway RIA firm. Could the decision to leave one company be a violation of the fiduciary duty a professional owes to their clients?
Job transitions are a normal part of business
If it were a breach of fiduciary duty to cease working for a company or managing a specific client’s investments, then financial advisors and other investment professionals would effectively give up their career flexibility when they take on their first clients. Financial professionals can and do leave one job to take a better-compensated position elsewhere or to start their own firms.
Typically, someone planning to strategically exit a company needs to communicate with their clients about that move and help transition them to a new professional who can manage their account. In some cases, professionals can even arrange for clients to follow them to their new firm. Whether or not they have a non-compete agreement or a non-solicitation agreement included in their current employment contract may influence whether suggesting client retention could lead to legal issues or not.
Unless someone starting a breakaway firm intentionally acts to damage the performance of portfolios managed by their former employer or otherwise harms their former clients as part of the transition, leaving a position at one company to start a new business typically does not constitute of breach of the fiduciary duty that a professional owes to their clients.
There are many legal issues that financial professionals usually need to address if they aspire to start their own breakaway firms. Resolving any outstanding obligations to clients and seeking proper support can help a professional fulfill their fiduciary duties as they transition away from working with specific people.