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To have and have not

Every financial adviser jealously covets their clients. Clients are, after all, the lifeblood in a practice. Inevitably, the relationship can be strained at times but overall it is the reason for being an adviser.

The industry is riddled with myth, rumour and counter-rumour as to who exactly owns what and how.

The first rule has to be that no one owns a client. Clients own themselves and have every right to go elsewhere. What financial planners work from is a curious bundle of benefits and obligations called servicing rights.

Servicing rights

The question should therefore be who owns the servicing rights?

This is very easy to answer. The authorised person does. If you are a network member, you do not own your clients. If you are directly authorised through a limited company, then it is the limited company that owns the rights.

This is fundamental because if you plan to sell your client bank at a later date, it would be better to know now rather than later where the ownership of the servicing rights rests.

The important element for client valuation is the payment element of the servicing rights – renewal commission to us mere mortals.

The best analogy is to look at the contractual relationships that exist and how the servicing rights are best expressed legally.

Contractual relationships

The rubric starts with the contractual relationship between the client and the authorised person. The second relationship is between the authorised person and the product provider. The third and final relationship is between the client and product provider.

An appointed representative of a network is one step removed from this equation and has no real contractual relationship with anybody.

Your client terms will always mention the authorised person. If you delve a little further, you, as the appointed representative, act as agent for the authorised person.

The network holds agencies for itself and provides its members with sub-agencies. Be careful with this relationship as network contracts vary from the liberal, allowing you to take servicing rights if you leave, to the extremely restrictive, imposing a bar on transfer. You need to be very careful. If you decide to change your arrangements, then you need to be able to move your client base with you.

Licence to advise

I would draw the parallel between a licence arrangement and a network arrangement. In my opinion, network members own a licence to hold the client files.

This argument is evidenced by the clause requiring them to return files to the network as soon as they terminate their agreement.

This has long perplexed network members as they believe, incorrectly, that they have the right to keep the files. In the majority of cases, files are photocopied so that both parties remain happy. Ironically, a number of network contracts do not provide for who should pay for this exercise.

Sale issues

If a financial planner is planning to sell their business to another practice, then they need to take very careful steps to plan an exit. The process of client transfer is made that much more difficult when the appointed representative contract prevents the transfer of servicing rights.

The transfer of clients can be undertaken in two ways. The first method is by deed of novation. This will only work if the ceding network is prepared to sign it. As part of any such arrangement, the network member will need to ensure that they provide for contracts with protected renewal periods.

The second method is a lot better if it can be organised because it allows the client to undertake the transfer on the network member&#39s behalf. It is a much better method to go this way as the client is a focal pivot in the transfer.

The sad fact is that authorised persons hang on to renewal commission for dear life. After all, the primary method of valuation for a practice is based on a multiple of renewal commission.

When looking at what they own, financial planners should be very careful. What they believe to be the case is not always the case.

The basis of understanding must start from the authorised person. What is the financial planner&#39s relationship with them? If is it contractual, what are the express terms? Be careful – to understand too late could damage something the financial planner has worked hard for.

Gareth Fatchett is principal at ProAct Legal


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