Wealth managers who leave firms and take clients with them are a double-edged sword for the industry.
While recruitment can represent a source of growth through the acquisition of new clients, at the same time, the loss of successful rainmakers represents a perennial business risk.
Individual wealth managers and their employers are likely to have been closely watching the Towry versus Raymond James court case last week. The verdict was a resounding victory for the seven former Edward Jones advisers who moved to Raymond James. The judge, the Honourable Mrs Justice Cox DBE, ruled they had not solicited clients.
At the centre of the £6 million two-year case was the question of whether there is a difference between non-dealing and non-solicitation covenants in contracts.
The non-solicitation clause meant the advisers could not approach or contact clients for 12 months after leaving the company. But Towry contracts – which the advisers had not signed – have a stronger non-dealing clause which states that even if clients approach their old adviser, they cannot do business with them.
Towry’s head of risk and compliance Nicholas Anderson believed the two were all but the same in practice, but the judge refuted this.
An industry standard?
In the wake of the case, Raymond James chief executive Peter Moores is calling for the creation of an industry-agreed standard on restrictive covenants in contracts to avoid a repeat of the case. He hopes to win the backing of industry bodies and the FSA for a UK version of ‘Broker Protocol’, which outlines rules for advisers to follow when they leave companies and has become established in the US in recent years. He believes it is particularly notable that the initiative has received backing from 600 firms and the first signatories were Citigroup, UBS and Merrill Lynch.
‘It would have to be an industry standard. People would say that Raymond James will be a net beneficiary of these types of things and obviously we are interested in doing it, but I would be interested to see if the FSA and other industry bodies would look at it and say, “why can’t the client have a choice?”’
He added: ‘I understand the need to protect interests through non-solicitation covenants, but why can’t the customer choose? Towry’s perspective is non-solicitation is very hard to prove, but if it happened it isn’t hard to prove and we would have lost the case.’
Raymond James’ head of business development David Hazelton has started to put the wheels in motion by enlisting the support of the Tax Incentivised Saving Association (Tisa) and offering to chair a working party to achieve consensus on restrictive covenants.
It is a move that has been welcomed by one industry consultant, who preferred to remain anonymous: ‘Certainly this is an area that needs sorting out. Lawyers are the only ones who benefit, not the clients or the firms.’
However, the proposals have been rejected by other wealth managers, who argue that agreeing a format and ensuring adherence would prove too difficult.
Charles Stanley’s head of legal Gary Teper said: ‘I suspect there is very little prospect of an industry-agreed standard in this area as there are too many obstacles for it to take place. What are the boundaries of the “industry”, how could we ensure compliance and what are the sanctions for non-compliance? In the absence of clear legislation or rules from a regulator, which is also extremely unlikely, the courts will continue to be required to adjudicate on such issues.
‘This particular area of law is extremely well developed and litigated. Indeed, it is somewhat surprising that Towry got it so wrong. The fact that clients chose to follow their advisers to their new firm is not in itself evidence of solicitation.’
His sentiments are echoed by Thurleigh’s Charles Mackinnon, who argues that even if legislation introducing an industry standard was passed, this could lead to further litigation, noting: ‘Tell me a law that has not generated other law suits.’
He added: ‘I don’t think an industry standard would make sense in terms of competition, as ultimately competition is a good thing. There will never be a standard.’
Emma Bartlett, a partner in the employment team at law firm Speechly Bircham, likens the exercise to making enemies shake hands. However, she is unsure whether an accepted standard would increase litigation.
‘With organisations like Towry who are trying to infer non-deal provisions where none exist, and the fact that in the IFA sector people are expected to move with some sort of following, it seems unlikely there would be sufficient support for industry standard,’ she added.
An alternative to restrictive clauses
Mike Browning, a regulatory consultant at Browning Treasury, believes there is a good case for an industry agreed standard but is also keen to stress an alternative to restrictive covenants altogether.
‘As has been proven by the recent case, restrictive covenants will not necessarily protect a company,’ he said.
‘The firms that tend to succeed in this space, do so irrespective of restrictive covenants, through good image and reputation combined with sound, secure systems, controls, organisational structure and oversight.’