Holding your clients hostage

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The non-compete clause that prevents advisers from taking clients with them when they move, is gradually becoming weaker.

As the profession moves towards a fee-for-service model, the only thing that gives an adviser any sort of right over the relationship is precisely that – Service. This is according to management adviser and business analyst Max Franchitto.

“If the client moves, it’s because they want to move. Theoretically, if you’re looking after your client they shouldn’t want to move.”

Franchitto says that although there is a clause to this effect in most contracts, that clause is becoming weaker, and progressively harder to enforce. As long as advisers don’t purposely poach clients, it will be hard to make a ruling stick, he says.

Judges are also beginning to agree with him. Townsends business and corporate lawyers were recently successful in defending a claim over alleged contract breaches. An employer selling their planning firm tried to claim for a loss in value, after some clients moved to a former employee – who was terminated three months earlier.

The judge ruled that, “ (T)he combination of the defendant’s conduct and the sale by the plaintiff of the business and the failure to service those clients all combine to bring about what would have been the loss of income to the plaintiff in commissions”

It was also mentioned that many clients would not have stayed with the firm because the defendant no longer worked there and because “the plaintiff was dilatory in servicing their requirements”.

However, there are other clauses that may trip advisers up. Another case from Townsends showed an adviser who had served out the 12 month restraint in his employment agreement, but found a “ferocious little confidentiality obligation” that lasted forever.

The clause said that any information about the clients, including their identity and contact details, was confidential information and banned the employee from using that information indefinitely.

Judge rulings on such cases varied, but one Judge said, “The employee cannot remove, whether by using paper or using memory, a material part of the former employer’s business records; but the employee can approach a particular customer or client whom that employee can recall without a list or deliberate memorisation.”

Franchitto says that the clauses are a deterrent for people churning clients, but that advisers shouldn’t kid themselves.

“If it’s a client that you have to threaten legally to retain them, then they’re not clients – they’re hostages.”

He says there are four main types of clients:

  1. The mercenary, who will use whatever adviser is the best option today.
  2. The defector, who moves around from one person to the next, from one provider to the next, looking for the best deal.
  3. The hostage, who will stay with a company that has something over them – typically staying with a bank where they have too much debt.
  4. Or the loyalist, who will stay with an adviser because they like what they do and how they do it.

“You’ve got to work out which type of customer you want,” says Franchitto. And if customers are walking, then take a look at your service first, then your fees.