Preparing for departures

Departures of client-facing advisers from a firm can be acrimonious, as employers worry about client poaching. How can companies hold on to business and allow advisers to leave on good terms?

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Who owns a client? That may seem like a strange question: clients are surely free to put their business and their funds wherever they like. But when a client-facing employee, such as a financial adviser, planner or fund manager, moves from one company to another, it can become a hotly disputed subject. The old employer will be keen to ensure that it does not lose any business as a result of the staff move; the adviser will want to take as much business as possible to the new employer; in the middle is the client, who will have their own opinions on which is the most important relationship.
Understand covenantsThere are four main types of restrictive covenants. The first, and most draconian, is a non-compete clause, which prohibits an employee from joining a competitor. The second is a non-solicit clause, which prevents the employee approaching clients and asking them to move to the new firm. Because non-solicits can be circumvented by a client moving of their own volition (with no demonstrable solicitation by the employee), some employers also augment employment contracts with a non-dealing clause, which prevents employees from accepting business from former clients for a predetermined period. The fourth, a non-poaching clause, is intended to stop a departing employee taking other members of staff to the new company.
Know what can be enforcedWriting a restrictive covenant is simple enough; enforcing it can be far less straightforward. “As a general rule, they can only be enforced if they go no further than is reasonable to protect the former employer’s legitimate business interests,” says Steven.

“The more draconian they are, the more difficult they are to enforce. Non-compete clauses are the most difficult to enforce; the other three are generally easier to establish as reasonable, but the devil is in the detail and it is crucial to draft carefully, having regard to the specific scenario.”
Listen to your clientsClients will generally not be aware of restrictive covenants preventing them moving with their adviser, and may be shocked and upset when these come to light. David Hazelton, head of business development at wealth manager Raymond James Investment Services, thinks that needs to change. “We think that, at a minimum, clients should be made aware in the firm’s terms of business statement of the existence of these clauses in advisers’ employment contracts. That would give greater clarity and allow clients to make better informed decisions if they object to the restrictions.”

In fact, he adds, some firms will not force clients to remain against their will, allowing those who write to complain to follow their adviser to the new company regardless of any non-dealing clauses. Those without the time, or knowledge, to do so may be forced to wait until the non-dealing period has elapsed, or to work with a different adviser if they move their business to the new company ahead of time.“The more draconian they are, the more difficult they are to enforce"Be wary of star movesIf the departing employee is a fund manager, the company will have little or no control over what happens to clients’ money. Indeed, the more high profile and successful the manager, the more cash is likely to follow the manager out the door. PIMCO lost more than $120bn in the year following the departure of its star fund manager Bill Gross in 2014; Invesco Perpetual saw £2bn withdrawn from funds managed by Neil Woodford when he left to set up his own business. Analysts and advisers will often put their fund recommendations on hold following the announcement of a manager’s departure, and may advise switching to a rival, or following the manager to their new firm. It can take years before it is clear whether the new managers will be as good as those they replaced – and whether the departing manager can continue to work their magic at the new company.
Always prepare accordinglyMoody’s says it is vital that companies establish a clear succession policy to reassure investors they are prepared for manager moves, and points to Invesco Perpetual, where Woodford’s departure was well flagged and he had already been working closely with his successor, Mark Barnett.

“Invesco’s approach to reducing key person risk has been to have a succession plan in place, and to use compensation incentives – such as share-based compensation plans – to retain the potential pool of successors and align their interests with those of the firm. Woodford announced his departure from Invesco Perpetual (UK) in October 2013, and although substantial sums of retail and institutional money flowed out of the firm’s funds, Invesco was able to execute its ‘succession planning strategy’, with Barnett taking on Woodford’s role in May of 2014. The transition was well executed, and involved a long transition period,” Moody’s wrote.

This article was originally published in the January print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
Published: 18 Jan 2017
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