About a decade back, part of my business role included acting as a kind of matchmaker and consultant with financial advisors looking to acquire or transfer a book of business. The individuals and situations ran the gamut of readiness from systematically prepared down through wishful thinking, with two circumstances that have stuck in my mind ever since.
In the first case, a blueprint was in place a decade ahead of planned departure. Two costly and time-consuming failed mentorships later, the exasperated advisor stood at the precipice of retirement, ready to jump at almost any expression of interest that might materialize.
In the other case, the advisor was begrudgingly considering selling, having observed a stream of her contemporaries leave the business. Not convinced of the economics of selling versus maintaining licensing and a minimal staff, she went on vacation to contemplate the options. She died on vacation, and by the time the estate was ready and able to address it a few months on, the book had plummeted to a fraction of its previous going concern value.
Somewhere in the intersection of these two predicaments lies the reported – and as yet unresolved – case of the estate of investment advisor Allen Eisen.
Planned succession frustrated
Allen Eisen joined Union Securities in 2009, executing an employment contract that included a transition payment for migrating clients over from his previous employer. The contract included a provision that “[a]ll accounts opened by you will be owned by you and may be sold within the company at the time of your choosing, subject to current policies and procedures.”
A supplementary letter a month later allowed Mr. Eisen to employ his son as his assistant. The son was in the midst of obtaining required licensing, with the apparent intention for son to follow in his father’s footsteps and eventually take over the practice.
Allen Eisen died in early 2010.
Lawsuit over book valuation and compensation
Pursuant to its regulatory obligations Union appointed another advisor to supervise the book. The son continued to be employed as assistant, with Union’s commitment that he could take over the book upon obtaining appropriate qualification. He never obtained the licensing and left his employment a few months later.
The supervising advisor also left the firm a few months later, taking at least one of those legacy clients with him. Union itself was sold to a new firm, and eventually the Eisen Estate filed a lawsuit against Union and the succeeding advisor for an accounting and compensation for the property value of the book.
Motion for dismissal dismissed
The Defendants took the position that as an estate could not be licensed, Union must be the owner after the advisor’s death in order to comply with its regulatory oversight obligations. It was however conceded that Eisen had the ability to deal with the accounts while living.
A generic Union employment policy document found among Eisen’s personal papers similarly stated that all accounts of a deceased advisor belong to Union. It was not clear how Union applied this policy generally, nor if, when and how it may have been incorporated into the Eisen-Union relationship. Even so, this emboldened the Defendants’ claim to sole ownership without requirement for compensation, unfair though that may appear.
The Estate countered that the specific employment contract terms in the 2009 letters superseded the generic policy. Concurrently, the Estate contended that the Defendants’ reliance on the generic policy would entail an inherent contradiction in that the policy asserts Union as sole owner of the accounts at all times, despite the explicit statements in the 2009 letters and the Defendants acknowledgement of Eisen’s lifetime right to sell.
On a Defendant motion for summary judgment brought in February 2013, the judge found that “[a]s a matter of legal logic, neither side has a legal argument that trumps the other.” On one hand, the Defendants are right that an estate cannot be licensed. On the other hand, the Plaintiff Estate is correct that trading authority is distinct from property rights and that there is something nonsensical about such property rights evaporating on death.
The judge ruled that full discoveries and a trial would be required to obtain a full appreciation of the evidence sufficient to dispose of the issues. Notably, it cost the Defendants about $15,000 in costs for the failed motion. Whether the litigation progresses to full trial now goes back into the hands of the parties.