A perennial question for advice firms is how best to attract clients. That can then lead to the related question of who actually “owns” the clients.
To avoid reliance on individual advisers prospecting, some firms create their own brands. This can certainly help attract clients but, as all good advisers know, there is more to it than that.
A brand may attract clients to begin with but, even for corporate giants like St James’s Place, most ongoing advice remains firmly based on individual personal relationships.
And here is the problem. Because of these relationships, advisers naturally tend to feel that the clients are “theirs” and, if they move on to another firm, will often believe they should be able to take those clients with them. Indeed, the ability to bring over clients is often a key factor in employing a new adviser.
But the firm they are leaving may have invested considerable amounts of time and money building or buying the client bank and will likely consider it a company asset.
Retaining the client’s fee income could be key to the business’s continued success. What is more, client banks are increasingly linked to dedicated admin teams, so taking clients could jeopardise those support staff as well.
The situation also leads to a Catch 22 scenario. Having lost clients, a company no longer has a ready-made client bank to offer a new adviser, meaning it looks for an adviser who can bring their own. And so the cycle continues.
To protect themselves, many firms impose restrictive covenants, which can stop the outgoing adviser taking on the clients for a set period – often a year. Of course, a business cannot stop its clients leaving but the covenants can be enforced if the adviser is involved in their decision to do so – usually for breach of contract or lost profits.
When this was discussed recently on an adviser forum, many felt it was unreasonable. A few thought advisers should be able to take their client bank with them.
Others believed that, while wrong to “entice” a client away, they themselves should have the right to follow the adviser if that is what they chose.
I am not sure I agree. While restrictive covenants often appear to be ignored or challenged, I cannot see why the business would not want to protect itself.
As I have mentioned, a business could have invested a lot in acquiring the clients in the first place. For it to then just say “never mind, you take them” seems like very bad business.
One of the forum contributors put forward a suggestion of a better way. Instead of a simple blanket restriction, what about a contractual compensation basis?
If an adviser could take their key clients at the expense of, say, the first year’s earnings, it might help to satisfy both sides of the equation (as well as focus minds on what the value of the client really is).
I am not going to hold my breath on this but it seems like a good compromise, allowing companies to protect their interests by receiving fair recompense, while at the same time honouring the personal relationships so crucial to the client’s value.
Scott Gallacher is director of Rowley Turton