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The glue that binds client ownership

Many people see consolidation as being one of the major trends that will mark the trail of the RDR implementation. I believe this will take a variety of formats – some where people want to leave the industry, some where people want to stay and embrace the changes whole-heartedly and some where they will not have any choice, leaving them forced to hang on if they want to realise any significant payment or income stream from the sale of their firm.

This takes me to the core question of the moment, who owns the client? Is it the adviser, is it the firm or is the client a free agent, with loyalty the only real glue?

I have always felt, and many legal cases have proved this, that restrictive contracts simply make the lawyers wealthier and everyone else more stressed.

The discussion about client stickiness needs to be had and it has to involve the client, otherwise, it is no different from the situation where people talk about someone in the third party when they are either next to them or close by and, in many cases, in earshot.

When you consider this issue at length, the concept of client ownership is some-what bizarre, even more so when, in one breath, departing advisers are compared with slave traders, only to find that the people making the allegation are attempting to fit clients with their own shackles.

As many rush for the exit, this particular discussion has surfaced at the most inopportune or opportune time, depending on whether you are selling or buying. The client proposition is the glue. Without it, there is no lasting value in the asset. I recall one firm making a buy with the intention of doubling its size. Once the business was fully integrated, turnover had fallen by so much that the borrowing to make that purchase almost exceeded it. This lack of detailed due diligence simply underlines why research is more important than haggling over the price.

When you operate a network-style structure with no employees, I fail to see why the network would think it was equitable for it to “own” the clients. However, where the advisers are employed and fully resourced, the departing employee should not think it is reasonable or indeed ethical to take clients with them. If you have not taken the risk of entrepreneurship, you should not benefit when you take your talents elsewhere. To have to defend this by legal means seems to tip the balance in a perverse direction.

From where I sit, the client is a free agent who decides where he wants to go and the real link with the client should be some form of service agreement. The more I think about it, the more I feel there needs to be some form of formal linkage between clients and firms, where clients need to give some degree of notice before they hop off somewhere else.

Obviously, if there has been some kind of dramatically bad service or some suspect advice, then I would imagine that would be enough of a reason to allow people to simply cancel the contract.
But in normal circumstances, where an individual just decides either to take care of their own affairs or wants to move to another firm, is it unreasonable that some notice is given to the adviser before people leave? I know of several firms in the US where the mini-mum term for an advisory relationship is three years. This enables these firms to focus on service instead of prospecting.
The public must recognise that they have a key role in determining their eventual bill. People wrongly believe that they can take twice as long to respond to us and have no impact on costs. They need to be adult enough to realise that if they want a reasonably priced arrangement, then they have to play their part too.

The issue of client ownership grabbed my attention following recent acquisitions. It is interesting to contrast the different approaches between different companies. I am led to believe that Edward Jones considered they were the owners of the clients and could sell them on.

In contrast, Park Row Corporate did not own any of the clients, (it was the core of their recruitment adverts) hence the reason it was so difficult to strike a deal. Irrespective of what the legality of the position is, clients have a right to vote with their feet.

Recent court cases have indicated that where covenants are challenged, the courts have continually commented that ultimately it is the client that decides where he is going to stay and the receiving company needs to engage with them immediately rather than just simply hope that the income trail continues.

Robert Reid is managing director of Syndaxi Chartered Financial Planning


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

  1. Well said Mr Reid. IF and only if the FSA revisit the Consumer Responsibility Paper and THINK aboout how the longstop should be applied i.e. if a client changes adviser, then QED the new adviser should be confirming ongoing suitablity of the product to the clients needs and hence the liability should crystallise on changing advisery firm starting a 15 year clock ticking for the last advice given by the ex advisory firm, a new clock should be started for the new firm on any product they assume the agency for, arrange or for the advice (no product advising is often the product), but the clock should not start ticking until eitehr the client chooses another adviser (that may simply be by choosing NOT to pay for ongoing advice) or something similar.
    Just as advisers and firms don’t own clients becuase clients have free will, there needs to be a balance in responsibilities and expectations of ALL parties to the transaction including providers.
    Lets see the FSA have some balls and actually discuss rights and responsibilities openly in a discussion paper NOW as this is actually a good time to do it BEFORE we have the next boom and everything gets too frantic!

  2. Before you can decide who owns a client (I would argue no one) it is necessary to define the meaning of the word “client”.

    For example a common mistake is to assume that the receipt of commission means that there is a client relationship. Not so. It is entirely possible to buy a client bank and to receive commission on a purely commercial basis.

    If a client is advised by another adviser can they still be called your client ?

    If a client does not keep in touch for a number of years are they still a client ?

    I believe that certain conditions are necessary before we can say that someone is a client.Firstly there needs to be a client agreement/TOB. secondly advice needs to have been given and finally and of most importance the client needs to confirm that they see themselves as a client.

    The importance of all this comes down to money. If The RDR and TCF are to mean anything then the idea that clients are owned by anyone must be outlawed and future contract written so that clients can take up their beds and walk.

  3. to John Blackmore – I couldn’t agree with you more and that is why we have just redrafted our Client Agreement and terms of Business to do exactly what you say. The client identidying whetehr they want an ongoing “client relathionship” or a one off “customer experience” is key and trail does not confirm or deny the position, hence all “clients” wanting an ongoing relationship will be expected to pay every month (even if only £1) and in that case we will consider them a client and treat them as such. The moment payment ceases, the relationship ceases and they should seek advice elsewhere, hence we tried to make this a contractural issue, i.e. longstop applies 15 years after ceasing to be a client unless you return for fresh advice/become a client and it is this the FSA threatened us as a firm for trying to do! Until the FSA actually understand how advisers work and discuss with them ways of delivering a balance of rights and responsibilites for consumers and advisers alike, the RDR will be a complete waste of time as we have no certainty of contract with our clients.

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