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Whose client is it anyway?

A reader writes:

I refer to comments made by Dr. Brian Benfield in an article you recently posted, and particularly to the following:

A clear understanding and application of the law of contract, including that of agency and its application to the intermediary is required. Intermediaries are increasingly facing liabilities which do not exist in contract. Greater obligations are imposed on intermediaries than on almost any other comparable discipline.

It will be interesting to hear how FAIS, TCF and RDR deals with restraint of trade conditions contained in broker contracts. There is bound to be some serious conflicts of interest regarding clients and to whom they belong.

I recently applied to be an FSP as a sole proprietor and left the previous FSP I worked for.

My contract with the previous brokerage said that, should I leave, all clients stay with the FSP and that I am not allowed to take them with me. In short I have to build a new book from scratch.

Now I have some clients contacting me for their “annual visit” and to make changes to their portfolios. After assisting the first client and changing the “broker appointment”, I was quickly reminded by my old employer about the contract wording. I was instructed to tell the clients, should they contact me, that I am not allowed to talk to them and that I have to refer them to the previous FSP or face the consequences.

I know we are dealing with labour law here, but what am I missing? How do some brokers get it right to work at one company, and then get the old “golden handshake” to join and then churn/switch all their clients to the new employer without having this difficulty?

How will RDR work in this regard? Ongoing fees are subject to continued service. What happens when clients become “orphans”, or don’t want to deal with a new broker? Also, the initial broker’s reputation is at stake as he diligently visited clients on a yearly basis and is now missing in action and not allowed to talk to them.

Am I missing something, or is it that the previous FSP is just being unreasonable?

Unfortunately for you, it is legal to use a restraint of trade clause in a contract to forbid you from contacting your old clients and doing business with them. Most service contracts contain a restraint of trade clause, although a court of law will apply a reasonableness test to ensure that your rights are not totally usurped. You may, for example, be restricted from doing business with clients you acquired during your employment with the FSP, but not from practicing as a broker after termination of the service agreement.

“Ownership” of the client has always been a very contentious issue between independent brokers and product houses. Previously, the formal contract was between the product provider and the client, with the FSP and its representatives acting as agents for the client.

The advent of mandates brought a new dimension to the table.

It is important to note that such an agreement between the customer and the registered entity, the FSP, determines the responsibilities of both parties.

The FSP, in turn, mandates the representative to act on its behalf, but cannot absolve itself from accountability for the actions of its representatives. It therefore has to include obligations on the representative to fulfill the requirements of the client mandate to safeguard its own interests.

Furthermore, the FSP has to ensure that its representative acts in accord with the prescriptions of its broker contract with one or more product providers.

The FSP is legally obliged to allocate orphan clients to other intermediaries, or back to the product providers, and to inform clients accordingly. It appears that the will of the client, where he wishes to remain with the original adviser, is not fully catered for. What if that client now indicates that he wishes to retain you as servicing intermediary, even if you are no longer part of that FSP?

The draft RDR proposals may change this, as it foresees the client having the right to stop paying ongoing fees if dissatisfied with the service he or she receives. It is possible that he may then mandate you to receive further service fees. Depending on the wording, the restraint of trade in your previous contract may override this.

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