The carrot-and-stick of adviser retention

As the number of practicing advisers continues to decline, it’s a mathematical impossibility for every licensee to achieve growth in adviser numbers.

Instead, attention and energy have shifted in some quarters to retention strategies and these strategies can take the form of either carrot or stick.

Professional Indemnity insurance is sometimes an effective stick in the hands of those licensees willing to wield it. When an adviser or a practice signals its intention to shift to a new licensee, it can be used to make the move unaffordable or administratively insurmountable.

One licensee head tells Professional Planner that an advice practice had signalled its intention to join it, but the practice’s existing licensee deployed PI as a weapon to put the kybosh on the move.

In essence, the existing licensee made the release paperwork too onerous to comply with in a timely manner; and then it sought an indemnity from the departing practice for any claims that might arise from the advice its advisers had provided, for a period of several years even after moving to the new licensee and was covered by the new licensee’s insurance.

The licensee head says the stunt worked: the practice abandoned its plans. But its relationship with the existing licensee has been cruelled forever. How that relationship can continue to function at all is unclear. The same goes for the licensee’s relationships with other practices in its network, who are fully aware of the stunt it pulled on one of their own.

Desperation tactics

Things must be getting desperate for some licensees if these are the tactics they’re adopting to hang on to advisers. It’s unclear if this approach is in fact illegal – it can depend on the agreements advisers enter into when initially joining a licensee and on changes to PI policies over time – but it’s certainly morally and ethically dubious, not to mention short-sighted and ultimately destructive of trust and credibility.

It’s also stupid of a licensee to think that any practice it tries this on with will not speak to other practices – both within and outside the licensee’s network – and that word won’t get out and eventually reach the ears of the media.

But that is exactly what has happened. Professional Planner spoke to licensees, consultants and advisers who said they know about the actions of this existing licensee and of other licensees that have adopted a similar approach as, to be blunt, a survival measure.

There are legitimate reasons why a licensee might impose PI run-off insurance requirements on a practice as it leaves the network, but using it as a tactic solely to delay or derail the departure is unconscionable.

The same goes for suddenly imposing significantly more stringent compliance requirements – another licensee blocking tactic being reported by advisers. Again, there could be legitimate reasons for the licensee’s requirements, but an obvious question to ask in the face of this approach is why the licensee had allowed the adviser or practice to fall short of its compliance requirements in the first place.

The PI market is constantly in a state of flux and while capacity is returning to the Australian market, licensees remain under pressure to remain cost-competitive to advisers. A common measure to control the cost of PI cover is to vary the terms to reduce premiums – for example, to set a higher per-claim deductible. But this means the licensee is potentially on the hook for a greater sum if a claim arises. Variations agreed with underwriters can also include imposing conditions on advisers and practices that leave the licensee.

Consultants Professional Planner spoke to recommend that advisers keep themselves up to date with the terms and conditions of the PI cover arranged (and renewed) by their licensee, and that licensees communicate with advisers clearly and in a timely manner about any variations to cover that may have occurred on renewal, and what impact they might have on an adviser or practice’s decision to leave.

It’s understandable that licensees struggling to achieve growth in a tight adviser market would want to do all they can to hold onto the advisers they have. But if that comes at the cost of ruining relationships and putting the rest of the licensee’s network on high alert, then you have to wonder… what are they thinking?