Plan Carefully, Act Quietly Before You Set Up Your Own Shop

If you're planning to leave an employer to set up your own shop, keep all pre-resignation moves as quiet as possible and take special care to stay within ethical and contractual guidelines. Otherwise, you could spend your first year in court.

A recent high-profile example involves Jeffrey Gundlach, a star bond fund manager at Trust Company of the West. He formed his own company days after TCW fired him last Dec. 4 for allegedly plotting to leave and take employees and company property. Gundlach has since attracted plenty of assets from his former employer, but he's also spending time defending himself against a TCW lawsuit filled with lurid allegations (which he denies). Separately, Morgan Stanley Smith Barney filed suit last week against a new firm formed by five former Morgan Stanley wealth managers.

It's not uncommon for jilted employers to sue money managers who become competitors. The motivation is obvious: Consultants estimate that portfolio managers who walk often take 80 - 90 percent of former clients with them.

Avoiding Trouble

Experts say the number one rule for avoiding a suit is keeping your mouth shut until the day you walk out the door.

"It's tempting for advisers to say to their clients, 'Mrs. Jones, I'm leaving and going to XYZ,' but that is seen as soliciting for your own firm," explains Danny Sarch, founder of White Plains, N.Y.-based recruiting firm Leitner Sarch Consultants.

Tell no one but your spouse, future partners and employees (if any). What's more, any negotiations with professionals - say with an IT consultant to set up a network - should be done in complete confidentiality, Sarch says. If you signed a non-compete, get up to speed on its relevant provisions. For instance, managers are often precluded from contacting clients for a set time after leaving.

Even without a non-compete agreement, employees have fiduciary duties not to take business from a current employer. The CFA Institute's Code of Ethics and Standards of Professional Conduct's Standard IV, "Duties to Employers," states in part: "Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information...."

Jonathan Stokes, who helped devise those guidelines, says professionals often ask the CFA Institute help line how to leave an employer without violating fiduciary duties. One rule of thumb: Until you walk out the door for the last time, your clients are your employer's property, not yours. "Until you leave your firm, you have to have loyalty to your firm. Your clients are your firm's clients," says Stokes, the institute's head of standards of practice.

What Stays Behind

Even after you leave, some information you used on the job remains the former employer's property. You may use standard client information you could find in a phone book or online, but anything more specific is problematic. "You can take basic name and contact information, but you're not supposed to take Social Security numbers, account numbers, performance numbers - nothing that is considered the property of the broker/dealer you're leaving," says Bill McGovern, head of consulting firm BD Search in St. Petersburg, Fla.

This applies even if you join a partnership that launched while you were at the old job. It's okay for a partner who's already independent to contact your clients while you're still at your old job, consultants and lawyers say. However, your partner should avoid telling clients anything like, "By the way, your advisor at Merrill Lynch is coming over here next month and you should consider moving with him."

Protecting Yourself

Most of all, leave no incriminating paper trail. "If a broker is feeding his (future) partner information that could be considered private information held by his firm, that's going to be an issue," McGovern warns. "No paperwork should be going out to clients ahead of your transfer."

One way a manager can stay on the right side of the line is to announce the move via a third party, such as an advertisement in a local paper or professional journal listing your name, contact information and investment goals.

The overall climate is improving for independence-bound professionals. Non-compete agreements have not held up well in court in recent years, particularly in California and a few other states. Still, some ethical boundaries raised by going independent remain fuzzy. Is boasting of your investment performance at a former employer ethical? It may be technically, but it's often unwise. Remarks one portfolio manager: "It just opens the question, can you achieve the same performance outside the wirehouse?"

The more successful you are, and the bigger hit your old firm stands to suffer from your departure, the more likely you'll draw their ire. The portfolio manager says if you are seen as "pirating" revenue from an ex-employer - say, taking more than 20 percent of their client business - that greatly raises the risk. That's illustrated by the Gundlach case, in which the departing star took a bunch of former employees and clients with him.

And no matter how careful you are, a firm might still pursue you simply as an annoyance. "Even if you don't have big pockets," cautions Sarch, "they might be coming after you just to bust your chops."