Who really cares about the client?

Despite the most fervent fantasies of all concerned, no one can ‘own’ a client. A client is not a chattel that can be bought and sold. Only the client can ‘own’ the client. I’ll repeat it for the slow learners. Only the client can own the client.

You’d think, or more precisely the client might think, that would be the end of the matter but there’s always a but. In many cases, two stakeholders in the client relationship — that is, the dealer group and the financial adviser — both think they have the right to keep the client’s business when the adviser moves on.

And here comes the but — neither party can own the client, but it is possible for one party (usually the dealer) to prohibit the other party (usually the adviser) from acting for the client for a period of time.

And that’s when things can start to go sour, not only for the adviser, but more importantly for the client.

Take, just for an example, the fallout from theChifleyadviser/dealer group tussle last year.

When a group of salaried Chifley advisers decided they no longer wanted to work for the dealer group they accepted, after a long and bitter argument with the dealer group, a payout of between six and 12 months’ salary on the condition that they signed a 12 month restraint of trade agreement.

However, it’s questionable whether a restraint of trade agreement would stand up in a court of law, particularly if the agreement is signed after an initial employment contract is drawn up.

Peter Townsend, senior lawyer at Peter Townsend Business Lawyers, says: “In all circumstances there is aprima faciecase that restraints of trade are unenforceable but the courts will enforce them under strict conditions and they must be complied with. But if the court regards the restraint to be excessive to the smallest extent, it will strike it out.”

And Townsend argues that in some ways employees of a dealer group are in a slightly better position than independent representatives.

“If the restraint clause is included in the employment agreement upfront, right at the start, then it’s reasonably clear that the restraint is enforceable. If it is added afterwards it is potentially still enforceable but according to industrial relations law, it may be regarded as harsh and unconscionable.”

The instance in which restraints of trade are most likely to hold up is when one party has paid another for the business — for example, if you sell your business to your dealer, and a restraint of trade is a part of that sale, the court is likely to regard that as enforceable.

But all of this still largely ignores the central question: what is best for the clients?

For argument’s sake, let’s assume a restraint of trade is enforced and an exiting planner is prohibited from contacting clients for a period of time. What happens to those clients?

Logically, a client might expect that:

1. Someone contacts them — preferably both the dealer and the adviser — to explain the situation and to let them know what might happen next.

2. The dealer group would assume responsibility for servicing them.

But what happens to clients when these things don’t happen?

A client of ex-Chifley planner Mark Maycock says Chifley never contacted him at all following Maycock’s departure.

It came at the worse possible time for him, having retired in November 2002.

“As if retiring isn’t stressful enough. On top of it all we had no choice but to find another adviser,” he says.

Maycock says having signed an employment contract containing a restraint of trade agreement when he began working with Chifley, he cannot contact his clients until the 12 months are up in August this year.

“Is that reasonable? [If] the cost of raising the prospect is borne by the planner, then that’s clearly your client; if it’s by the dealer group, perhaps not, but then again, the development of the relationship is between the client and the planner, it is not between the client and the dealer group,” Maycock says.

To be fair, Chifley does appear to have contacted most clients, but only to tell them they could no longer be serviced by Chifley and so would be serviced by a third party —Monitor Money.

As reported inMoney Management, Chifley made an arrangement with Monitor Money to service Chifley clients (read sold them) after the exit of the planners.

Some ex-Chifley clients, like Malcolm Douglas, a one-time client of Richard McGrath, were contacted by the dealer group but absolutely refused to accept being serviced by a Monitor Money adviser.

“I don’t appreciate being told who services me. The reason for me putting my business with Chifley in the first place was because of an individual not because of the group,” Douglas says.

“If I’m going to have someone earning money from me it’s going to be someone I know and trust. I’m not going to be told by Chifley who I should and shouldn’t be dealing with and what I should and shouldn’t be doing with my money. I want to follow Richard.”

Unfortunately, the law — which is often an ass — might say otherwise. Townsend says that it all comes back to the wording of the restraint of trade clause in the contract.

“Advisers need to be watchful of the wording which may say either one party cannot approach, one party may not solicit or one party may not act for clients. If they agree not to approach or solicit, they can still act for the client if the client approaches them. However, if they sign a contract saying they will not act for the clients, then they cannot act for the client under any circumstances, not even if the client wants them to.”

Chifley is not a case in isolation. Unfortunately, disputes between exiting advisers and dealer groups are all too common.

Townsend says the best thing advisers and dealers can do is to work out at the very beginning of the adviser/dealer relationship how clients will be handled if the relationship ends.

But while some dealer groups are proprietary about clients, others approach the problem altogether differently.

Maycock, who once worked for Bleakleys, saysINGwas “very civilised” when he wanted to leave the dealer group.

“I took my clients with me, even though ING had paid good dollars to buy Bleakleys. ING took a pragmatic approach. They decided it was all too hard to try to keep the clients.”

Mike Goodall, outgoing head of advice at ING, says ING holds the view that contractually the adviser has the right to service the clients and the dealer does not.

“That comes from the view that there is no point in creating acrimony in this industry,” he says.

“It’s a small industry and we’ve learnt you don’t burn bridges in a small industry. To take a counter view is not in anyone’s best interests, least of all the client’s.”

The belief over at AMP-owned dealer groupHillross, is that the client decides who services the client — not the adviser and not the dealer.

“The client owns the client. We are relaxed about that. The client has the right to choose whether to move with the planner or not,” says Jack Regan, managing director of Hillross.

“When one of our planners leaves, we write to their clients explaining what has happened and ask them to tick a box saying whether they want to stay with their existing adviser or move to another Hillross adviser. In most cases they go with their existing adviser and we are comfortable with that.”

It’s a little bit different atAMP Financial Planning(AMPFP) where clients are transferred to another AMP adviser.

However, managing director of AMPFP Greg Kirk is quick to point out that AMP buys the planner’s business from them.

“When an adviser leaves we will pay them out for the business, so there are restrictive covenants on the contract that constrain ex-AMP advisers from contacting clients after they leave us.”

Sounds reasonable. More reasonable is that Kirk says AMP is always prepared to make some minor exceptions to the rule.

“We allow our advisers to keep a small selection of clients — for example, family and friends. And obviously if the clients want to move with the adviser, if that is their express wish, then we honour that wish.”

Putting the client first — that’s an interesting concept. If only the rest of the industry could think the same way.