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How to avoid legal conflict when an adviser leaves your firm

As one descends inexorably towards middle age, nothing seems to hit that sweet spot of irritation more than the modern propensity to make up words.

One example of this came when Hollywood actress Gwyneth Paltrow and Coldplay frontman Chris Martin announced they were “consciously uncoupling”. Whatever happened to a good old-fashioned break-up?

But despite the pretentious phrasing, advisers and their firms would do well to follow this positive approach to ending a relationship. That people move around, for different reasons, is a fact of business life. It need not be a cause of as much strife as we regularly see.

As a firm losing an adviser, you will have invested in them, backed them and allowed them to use your resources. You will want some reasonable expectation it will reap the benefits of revenue growth in return for that investment and be able to protect its confidential information and intellectual property. For that reason standard agreements will include:

  • Ongoing obligations of confidentiality
  • Recognition of ownership of intellectual property
  • Post-termination restrictions, prohibiting poaching (“solicitation”) of clients (or staff or suppliers) and doing business (“dealing”) with customers for a restricted period.

As an adviser looking to move, the reality will often be you have long-standing personal relationships with clients. These can stretch back years and span life- changing events. Some advisers may think “why on earth should I give up these relationships?” Others will not have read the agreement for a long time and spare no thought to the covenants at all.

Parties in conflict 

The firm the adviser is moving to is making its own investment. It brings people in, by and large, with the expectation they will both have, and be able to grow, a client following. This, in turn, drives the firm’s financial performance.Each of the competing interests here is understandable and legitimate.  Unfortunately, the pattern we see repeating itself over and over again is one in which all three parties come into conflict.

We see advisers taking confidential information (the classic examples being emailing materials from work to personal addresses or accessing and printing databases) and using it to try to convince clients to follow them and/or breaching non-solicitation obligations during the period of restriction.

Understandably, the old firm is aggrieved and, at the very least, sends pre-action correspondence through lawyers asking for under-takings that the covenants will be complied with. The matter spirals into an ongoing legal dispute, with parties arguing about whether covenants are enforceable.

The new firm gets dragged into the matter as the old firm wants to know what it knew about the alleged breaches of covenants and whether it received, and has used, confidential information. More often than not, some form of compromise is reached, with undertakings not to use the material being offered. However, this is not before all parties have incurred legal costs.

Even where the old firm wins such action, they often have costs they cannot recover from the other side and client relationships that have gone and are not coming back.

What is frustrating about those situations is that they are often avoidable. The reality may have been that the adviser moving would have brought x per cent of their clients with them by virtue of personal relationships. Rather than fly under the radar, all parties could have sought to have a frank conversation around that upfront.

Even if they could not agree anything, everyone could proceed in a manner compliant with their contractual obligations, and all three parties could still get at least part of what they want from the situation:

  • Some clients will inevitably follow the adviser, who can compete once free of restriction
  • The new firm can take on those clients and help the adviser comply with his or her covenants
  • The old firm gets the protection they are entitled to as obligations are complied with, and has the chance to introduce new advisers to the clients
  • No one spends thousands of pounds on legal costs.

Clearly, there will be situations where disputes are unavoidable or lines are crossed. But maybe Gwyneth was on to something: maybe we could all benefit from a little more conscious uncoupling and a little less breaking up.

Peter Singfield is partner at Foot Anstey LLP

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. I was rather hoping this article was going to provide me with a perfect watertight solution to protect my hard earned client bank so yes I’m disappointed.

  2. How about thinking about it from the client’s point of view? Perhaps their wishes should be paramount? Non-solicit may be reasonable but non-deal? How is it a good (or a TCF) outcome for a client to be told that they can’t deal with a an adviser they have a long-standing relationship with because of a contract they are not party to? It beggars belief that the regulator allows firms to shackle clients in this way.

  3. I think it is high time adviser firms just grew up.
    1. The client relationship is NOT with the firm, it is with the adviser.
    2. Ask yourself why the adviser wants to move? Probably because he/she isn’t getting a decent deal where they are.
    3. In any other industry staff come and go without all this angst. A widget operative or salesman can move to a competitor. The same concerns exist – patents, intellectual property, customers, working practices etc. It’s just a fact of business. If the employee is valued then you just have to try to keep him/her. If they are not valued then what are you bleating about?
    4. If your firm and proposition are so weak that it cannot withstand such an event, then I guess you had better do some self-examination.

  4. I have wondered how the FCA and/or courts would view a contract that effectively prevents a client from seeking the services of an adviser. How can such a contract be enforced if it is restricting the options of someone who wasn’t party to the original contract?

  5. Martyn Sinclair 25th March 2017 at 12:35 am

    there is only one person who owns the rights to any particular client & that is the client. So stop telling the client who they have to deal with and let the client decide….

  6. Agree entirely it is the clients choice who they deal with when an adviser leaves.

    Self employed advisers should and do indeed take their clients with them.

    Employed advisers on the other hand have been paid by their employer to do a job for the firm which is to promote the firm’s proposition and service the firm’s clients.

    They will have a contract of employment that sets out what they can and cannot do as far as approaching clients after leaving the firm.

    What they must not do of course is steal data from their employer to facilitate such an approach.

    It really is quite straightforward

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