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Would industry standard on restrictive clauses work?

by Danielle Levy on Feb 29, 2012 at 00:01

Would industry standard on restrictive clauses work?

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.

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6 comments so far. Why not have your say?

Frank Dolan - Novatis

Feb 29, 2012 at 11:18

Phrases such as "unreasonable restraint on trade" spring to mind here.

In other professions/industries, these restrictive clauses have proved difficult to enforce - and ultimately, if a client expresses a desire to leave firm A and go with their former adviser at firm B, what right does firm A have to (try to) stop them? If I - as a client - decide I no longer want to deal with your firm but wish to follow a trusted adviser who has moved elsewhere, you may as well accept that you will lose my account no matter what. In any case, what right do you have to tell me who I can or cannot deal with?

Solicitation is a different issue and blatant solicitation of a firm's client list should be robustly challenged - but it has to be absolutely clear from the outset the basis on which the relationship is establised. Is the adviser dealing with the firm's clients? Who 'owns' (for want of a better word) a client who is introduced to the firm by an adviser? What if the client is a member of the adviser's family - will you attempt to enforce your restrictive covenant then?

Solicitation is often not blatant and as a former sales branch manager, I have had to deal with the effects of departing advisers who had clearly enticed clients to move away but had done so in such a way that it was nearly impossible to prove without the help of the client - and for many reasons we chose not to involve them. It was indeed the case that all clients 'belonged' to the firm and there was a 'no solicitation' section in the contract but in a business that relied on close personal relationships between adviser and client, it was difficult to enforce such clauses.

It is up to the firm to manage the client relationship in such a way that a departing adviser not only does not have the opportunity to solicit a client but also that there is little reason why a client would want to leave however that utopia is not achievable 100% of the time, so in the absence of outright evidence of blatant solicitation, I'd bow to the client's wishes.

Mass client defections are yet another area but again, if a firm is ticking all the client's boxes, the defection of an adviser can be overcome. Sadly large chunks of the financial services profession are often appallingly bad at customer service beyond adviser level - and even some advisers are guilty of being no better than fair weather friends.

I have no problem with anyone coming up with an industry standard restrictive covenant on non-solicitation but I think the issue will be with enforcement and through the courts, the only winners will be the lawyers. Ultimately, the financial services industry/profession needs to look closely at its relationships with its clients before attempting to create (what I believe will be) largely unenforceable restrictive covenants.

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Feb 29, 2012 at 14:41

The presumption of both the article and Frank Dolan's response is that the Towry approach is is the only way. But is it? Why not take a different approach? Why not accept that the prime loyalty of clients is to the individual with whom they have a relationship, especially when that individual provides value? From asking that question, it's not a big step to the realisation that a partnering approach is a sensible one. The Raymond James business model reflects this, as does that of Redmayne Bentley and other stockbrokers.

The listed private client managers avoid the issue by paying well, making any trade-off between remuneration and freedom of action favour them over the individual. When done well, there is not a huge discrepancy between the share of the revenue. But the gulf between the owners of the business and the business generator can be very wide indeed, giving scope for all sorts of undesirable activities, ranging from commission-driven investment decisions to inappropriate handling of client assets a la Pritchard Stockbrokers.

The matter is further compounded by the prevailing regulatory view that more paper solves all ills and prevents frauds. It's of no consolation to the poor client that filings were up to date and a T&C scheme was in place if a director has trousered some of their money. There is scant comfort for the poor CF30 who accepted that all was well at Head Office when his clients have their accounts frozen and he loses his job.

Having a robust business model and having that model understood (and at times challenged) by employees, clients, shareholders and regulators is the surest way to reduce complaints, litigation and the mistreatment of clients. With Martin Wheatley in the hot seat at the FCA (instead of Margaret Cole) there may be some grounds for cautious optimism.

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Frank Dolan - Novatis

Feb 29, 2012 at 15:21

I was trying to suggest that restrictive clauses weren't the answer, even though they need to be in contracts - sorry if that didn't come across well!

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Feb 29, 2012 at 18:02

You're right, but I was trying to be even more revolutionary. However, everyone else has lost interest and gone in the meantime.

Are you out there, Evan?

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Midas via mobile

Mar 03, 2012 at 09:45

Firms that treat Advisers Fairly (TAF) and clients TCF should not fear advisers leaving. We offer to novate any departing advisers clients to them if they want to leave. Non have left?

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Mar 05, 2012 at 08:39

The Midas touch seems to have had an adverse effect on your English, old boy. Would you please translate?

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