Whose book of business is it, anyway? Confusion reigns on ‘ownership’ of investment firm client lists

There are few, if any, legal issues affecting the investment industry that are more cloudy and less certain than whether investment firm clients belong to the investment advisor or to the investment firm.[1] And there are arguably few issues more important.  An investment firm’s financial bottom line is largely tied to the number of clients and the value of the assets contained in their accounts. Investment firms typically view those clients as clients of the firm.  For an investment advisor, his or her client base – or book of business – is a valuable asset that is personally built and cultivated over the advisor’s career, follows the advisor from one firm to another, and is often “sold” to a colleague (usually with the tacit or express approval of the firm) when the advisor retires.  Throw into the mix the fact that it is really up to each client to decide whether to follow an investment advisor from one firm to another and you get a difficult mix of competing rights and responsibilities that are often at odds with each other. This mix has been a recipe for litigation that has led to several widely divergent – and even confusing – court decisions on the issue over the past few years.

Probably the most notorious recent battle over departing investment advisors and the clients that followed them is the ongoing B.C. action relating to the wholesale departure of most of the employees in RBC Dominion Securities’ Cranbrook branch who then joined Merrill Lynch: RBC Dominion Securities Inc. v. Merrill Lynch.  The solicitation of clients to move their business from RBC to Merrill Lynch led to a multi-million dollar trial judgment against both Merrill Lynch and the former RBC employees.  The B.C. Court of Appeal largely set aside that damages award in a January 2007 decision in which it found, among other things, that the clients had never “belonged” to RBC and thus no damages flowed to RBC when those clients left.  The B.C. appeal court further found that an investment advisor’s book of business is something built up by the advisor’s own diligence and that it is in the interest of the clients, and the public at large, for an advisor to be permitted to take with him and use his clients’ contact information when moving to a new firm.  The Supreme Court of Canada will hear the appeal from this decision in April 2008.

Cases in the Ontario Superior Court have come down on both sides of the question of who owns an investment advisor’s book of business.  In his 2005 decision in King v. Merrill Lynch, Mr. Justice Smith dismissed a claim by a former Merrill Lynch investment advisor and his assistant for wrongful dismissal and for damages for Merrill Lynch’s retention of his clients following his departure.  In doing so, Smith J. found that the plaintiff’s book of business was comprised of clients that really belonged to Merrill Lynch because, among other things, those clients had opened their accounts with Merrill Lynch, signed agreements with Merrill Lynch and received statements from Merrill Lynch. As a result of this finding, and the fact that he had been dismissed for cause, Mr. King was denied any compensation for the loss of his alleged book of business.

A very different conclusion was reached by the Ontario Superior Court this past October in Clark v. BMO Nesbitt Burns.  In that case, Mr. Justice Jarvis granted judgment in favour of a dismissed investment advisor not only for damages for wrongful dismissal, but also for the loss of his book of business or, more accurately, the loss of his ability to sell his book of business to another advisor upon departing the firm.  In arriving at his conclusion, Jarvis J. referred to the common practice in which retiring advisors sell their book of business to a colleague, subject to the approval of the investment firm.  The plaintiff, Mr. Clark, had already discussed selling his book for as much as $175,000 to another Nesbitt advisor. Jarvis J. found that, in being wrongfully dismissed without notice, Mr. Clark was deprived of an opportunity to finalize such a sale. The judge went further to find that BMO Nesbitt Burns had an implied obligation not unreasonably to refuse to consent to the sale of the plaintiff’s book of business. As such, Mr. Clark was awarded $90,000 for the loss of an asset that, in King v. Merrill Lynch, had been found to belong to the investment firm and not the advisor.  It remains to be seen what the result will be on the appeal that will most likely be launched from this decision.

The courts’ past treatment of investment advisors’ books of business leaves the question of who owns such valuable assets very much up in the air.  It is by no means certain that the pending Supreme Court of Canada appeal in RBC Dominion Securities Inc. v. Merrill Lynch will clarify the matter or that this issue can be clarified given the diversity of arrangements that exist in the investment industry among advisors, firms and their clients.

The solution?  Probably the best way for investment advisors and firms to ensure certainty and protect themselves is by entering into clear and enforceable contractual terms dealing with ownership of books of business and the right of departing advisors to solicit their existing clients or their obligation to refrain from doing so. Courts have shown a willingness in recent cases[2] to respect and enforce detailed contractual terms governing investment advisors’ books of business and dealings with clients upon their departure from an investment firm, although they remain hostile to broader non-competition clauses.

Published November 22, 2007