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Scott Gallacher: Consider the firm’s fate before taking its clients

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

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. I think your article is very succinct and accurate, pointing out that yes, client ownership is the self-perpetuating “Merry Go Round”.
    As a recruiter and consultant to a number of Advisory Practices I see this argument from both sides of the fence. Clearly I don’t want to bore everyone with the rights and wrongs of perceived ownership, as safe to say each party sees it from their own perspective.

    ADVISER “They’re my clients, I have dealt with them for 10 years”

    COMPANY “The clients are mine the adviser works for me (often not differentiating between employment status of the adviser). I own the clients. By the way do you have any advisers with a client bank on your books? “Contradictory!!!!!

    CLIENT “It’s my ball and I will say who plays with it”

    Incidentally I have never known a company enforce a restrictive covenant over Mr. Smith who generates fee income of £1,000 per annum, phones for a valuation weekly, expects 2 review meetings per annum and insists on an ad-hoc meeting every time the price of goat milk fluctuates in Outer Mongolia.
    It is tough out there and may be in the harsh reality of a “Covenant Free World” client ownership will strengthen company and adviser bonds or fracture them. I often feel that advisers are shackled to companies, with Golden Handcuffs, that are not offering a strong advisor proposition and consequently not a great client proposition. In essence, the power at this time is still with the might of the advisory company and not the adviser.
    For every Advisory Company that is asset gathering to the detriment of its clients and its staff, there is an adviser taking a journey through a number of advisory practices building his own client bank rather like a Magpie ready for a pre-retirement capital event. I don’t think a cynical suggestion of a “Paradigm Shift” will alter Human Behaviour.
    We live in a democratic society which offers choice so let us hand the choice back to the Clients whilst ensuring Advisers are free from the fear of ensuing legal action.
    The world is never going to become a Panacea where advice is free, with great results and no complaints, contradictory to some FCA directives. The business of financial advice is ultimately a business and will always be so. Therefore, whatever your beliefs on client ownership, it really is a case of Gladiators ready. Ultimately it is governed by Financial Strength and Data Protection Laws; Currently it is NOT the clients choice.

  2. In the days when I had self-employed consultants I gave them a very fair contract which delineated three types of client; 1) Those who were already clients of the firm whom we passed to them for specific transactions, e.g. a mortgage; 2) Clients generated by them personally, e,g, referrals; 3) Clients the firm generated and passed to them as leads. The contract provided that if they left us, they could not go after those in category 1, we could not go after those in cat. 2, and we could both seek to retain clients in cat. 3. We never broke the deal and neither did any of the consultants after they’d left, so everyone was satisfied. It’s not difficult to achieve, provided that 1) You’re reasonable fair-minded in the first place; 2) Leavers are in no doubt that you will keep your end of the bargain and hold them to theirs.

    • So far as employed advisers are concerned, all clients belong to the company and that is made clear from the outset of the employee/employer relationship. The company pays all the acquisition costs and carries all the risk, not the individual adviser. Data protection law is adequate to provide for sanctions against any employed adviser who lease and then solicit clients away. There was a major DFM firm that had such a case I recall, maybe a dozen years back. They simply produced evidence from their system as to when data had been stolen and that was enough to wipe out the guys that did it, what with the legal costs and everything.

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