Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/new-model-adviser/gallery/a658078
10 tips to help you get to grips with adviser employment contracts
by Roderic Rennison on Feb 11, 2013 at 13:46
Last year’s court battle between Towry and Raymond James served to confirm adviser employment contracts are not always well-drafted or well-understood neither by the employer nor the advisers. If you have not reviewed your firm’s adviser employment contracts in the light of this case, you should do it now. Here are 10 tips to help firms get their advisers’ contracts right and avoid costly disputes.
What’s in a contract?
You need to be clear what you want any contract to achieve. You must have clarity around client ownership and the accompanying obligations of each party.
If something is unclear, make sure you have the agreement of the business owners confirmed in writing before you start any review exercise.
Money spent on lawyers is a necessary evil and avoiding it is likely to be a false economy.
It is tempting to assume someone else’s employment contract is fit for your purpose. However, this could lead to you inadvertently incorporating unnecessary or contradictory elements into your contracts. Mixing contracts from different sources is even more dangerous. It is best to pay a lawyer to draft the contract for you.
Hire the right lawyer
Obtaining input from a suitably qualified lawyer is a prerequisite. Not only should you hire a specialist employment lawyer as opposed to a generalist, but you should hire one who can demonstrate knowledge and experience of dealing with financial intermediaries.
Do not be afraid to ask for references before you commit. Set out in writing what you are expecting to achieve and get the required confirmations in writing before you start.
Keep it simple, stupid
The Kiss principle – ‘Keep it simple, stupid’ – is one to keep firmly in mind when drafting adviser employment contracts. Everyone benefits when contracts are written in straightforward English as they are more likely to be understood and adhered to.
Communicate, communicate, communicate
Firms that take steps to explain the contents of the contracts to their advisers – ideally by organising a face-to-face briefing with the lawyer who drafted it – are likely to have fewer disputes because there is less room for misunderstandings.
Firms should also consider going a step further and producing a simple guide to help employees understand the meaning of the contract and its impact in specific circumstances. Trying to keep the terms hidden, obscure or unclear serves no useful purpose.
Ensure contracts are drafted in a way that enables them to be adapted for possible changes rather than having to go through the cost and bother of wholesale redrafting.
Additionally, take steps to ensure the changes are effectively communicated and acknowledged by the advisers, ideally in writing.
Beware of the impact of acquisitions
As seen with the fallout from Towry’s acquisition of Edward Jones, an acquisition can trigger disputes over contracts and client ownership.
You need to make it clear what is expected of advisers with regard to client ownership, and the consequences and possible penalties for failing to meet the agreed terms of the contract.
If you acquire a firm and retain its principal, they should be fully bound in the same way as other advisers and the financial penalties should be spelt out clearly.
Where one firm has acquired another, make sure the terms of adviser contracts are consistent and do not clash or contradict each other. For this reason, if it is legally achievable, having a standard adviser contract across all companies in a group is desirable.
Don’t forget the obligations of retiring advisers…
If you have set policies or procedures that apply on an adviser’s retirement, these should be set out in the contract. Where ongoing commission or fees are to be paid, the obligations of the retiring adviser in relation to their future activities and conduct should be clearly spelt out.
…and those advisers who take over the retirees’ clients
When an adviser inherits clients from a retiring IFA, it is also vital the inheriting adviser is clear about client ownership and any commissions they must cede to the retired adviser. It is best to obtain their written agreement to these terms and their ongoing obligations.
Having spent time and money drafting new or revised contracts, take steps to ensure they are signed and filed away safely. A surprising number of firms fail to do so, which can often damage their intended outcomes.
Make a specific person responsible for oversight to ensure there are no loose ends. The same applies to reviews and amendments.
While advisers are the lifeblood of any firm, the contracts that confirm their entitlements and obligations are fundamental if a business is to demonstrate its effective management and control of its resources. This in turn will help to underpin the worth of the business to an acquirer in case of a future sale. The quality and enforceability of adviser contracts will have a direct impact on price.