When an adviser leaves a practice there is the inevitable conflict over who has the rights to serve the client.
Koda Capital chief executive Paul Heath tells Professional Planner a company trying to exercise ownership of a client without recognising the “special relationship” between client and adviser is “fraught with danger”.
Instead, he argues advisers having a stake in the practice helps mitigate that potential conflict.
“We think that’s why ownership of the firm by the advisers is so important, because it doesn’t then create a conflict between the ownership of the client from a corporate perspective, and the ownership of the client from an adviser relationship perspective, because the company and the [adviser] are the same.”
Koda’s shared ownership means the client is considered a client of the firm, because the adviser is the firm.
However, this is not usually the case and the adviser’s relationship with their clients does not outweigh the firm’s ownership of the clients.
Tim Lane, partner at Finconnect Advisory, says in general, when an adviser leaves, they cannot take their client book with them, unless previously negotiated with the firm.
“At certain levels, advisers will come with clients. Often, you’ll see a contract which says, if you brought these 50 with you, you can take them when you go,” Lane says.
Unbound Financial founder Charmaine Hall also has a unique perspective, having been made redundant by Insignia-owned Bridges before founding her own business in Wangaratta.
Many of her clients reached out independently through social media or other avenues after learning of her departure.
Hall says the licensee provides the framework for advisers to be able to provide advice, but the relationship between client and adviser should be able to be maintained.
“There are some cases where you can approach the licensee, explain your plans and then there will be a buy-up for your book of clients,” Hall says.
“In some instances, some licensees might not be open to that as well. It really just does depend on the flexibility of the licensee and whether they’ve got capacity to continue servicing those clients, or if they’re happy to let you take them with you considering you’ve done all the hard work to build a relationship.”
However, if an adviser leaves a firm and takes all their clients with them that’s “not a great look”.
Lane says he sees instances where advisers have just taken a client list upon departure without prior negotiation with the firm.
“That’s a no-no, because that clearly shows intent that you’re going to poach those clients.”
“Having a good relationship with the office you left and doing everything the right way is [the] better way to run a business. You don’t really want to be known as the advisor who pinched everyone’s clients.”
Contract restraints
Lane says every time a firm employs an adviser, there should be a restraint in an employment contract which clearly lays out what happens with the clients should the adviser leave.
Restraints are also known as non-compete clauses and usually last between six to 12 months.
“The restraint in the contract has to be viable and has to have certain criteria around it so that it’s enforceable [at law].”
Whether the restraint would stand up in court, however, is down to the particular case and how detailed the terms in the contract are.
“My view is you protect yourself best with a contract that has a specific damages and amount clause for the ones that go because you clearly narrow the amount of debate,” Lane says.
There are many grey areas, for example if an adviser is made redundant and how much that would stand up in court.
Hall says her non-compete clause was a very grey area as she was made redundant and did not leave of her own volition.
“There were enough threats that came out to make it a little bit daunting to cross any lines there,” Hall says.
“I sat and waited patiently, and the clients that would follow did reach out, and I certainly wasn’t going to turn them away.”
Lane recommends that to avoid any legal action or difficulties, advisers who have left and are contacted by previous clients should initially refer them back to the firm they came from.
“If you know they’re going to come and you can’t stop [them], go and negotiate a solution with that office where you make some payment for them,” Lane says.
Heath says Koda avoids these situations both because the advisers own the company and those who join almost always bring a client book with them.
“When we look to bring advisers into the firm, we’re looking primarily to find advisers who we think have that ability to have that really special relationship with the client,” Heath says.
“Because if that relationship is there, and it holds, those clients will inevitably follow their adviser to the new firm.”
Client autonomy
Despite debate over whether the business or individual adviser has the right to serve the client, autonomy and choice of the client should be the first consideration.
“The notion of selling a client is really problematic for me, from a philosophical point of view, because clients are not just a contractual revenue stream,” Heath says.
Heath takes the view that while there is a “contractual relationship” between client and firm, it is still the adviser’s and therefore the firm’s responsibility to build a client experience.
“The great advisers use [the relationship] as a window into the rest of the firm, so the client really feels as though they’re a part of something,” Heath says.
“There’s a contractual element, but there’s an experiential element, and they’re different.
“Unless we make that client feel great, unless we deliver a set of services and experience that the client values, those contractual relationships aren’t worth anything.”
At a fundamental level, clients do not want to feel like a commodity that can be bought and sold to whoever.
“Clients absolutely hate ‘you’ve been bought’ or ‘you’ve been sold’ and you have to go here,” Lane says.
“That doesn’t go with a client.”
Lane warns there can be situations where the client walks when the adviser and firm can’t agree over ownership.
A potential problem that can arise is both the firm and adviser lose the client and nobody wins.
“You’ve got to be careful you don’t end up with a lose-lose, everyone loses the client situation,” Lane says.
Lane adds this plays into why firms do not want to see the contract restraints go to the court level, as the view of the court is usually the client owns the client and so they can be reticent to enforce the restraint.
Hall also says advisers and clients value the personal connection and do not want a switch-up of advisers when the one they have been seeing leaves the firm.
“Clients aren’t the commodities we bought and sold. It’s a personal relationship that they build with the adviser is not about the licensee at all,” Hall says.
