By Mark de Ste Croix, Head of Compliance & Legal, Raymond James Investment Services
It has been a little over two years since a group of former Edward Jones advisers fought Towry over the restrictive covenants in their employment contracts. Brewin Dolphin and Charles Stanley now look set to join battle over restrictive covenants. There have been some efforts to address some of the issues raised; most notably by TISA to agree an industry standard protocol.
For firms, there is a need for tight restrictions to be put in place. As a result there has been an increase in the inclusion of non-dealing clauses in contracts, as opposed to the harder to prove non-solicitation. From the advisers’ perspective not a lot has changed other than more advisers are now subject to increased restrictions on their activities when they leave the firm they are with.
In the Towry court case a number of clients gave evidence and it was abundantly clear that in every case they wanted to deal with whoever they wanted to. To suggest otherwise would be a restriction that they never agreed to and a Machiavellian curbing of their freedom to choose. Assuming the client comes first, where exactly does that leave non-dealing restrictions?
In the USA, where the rights of the consumer are king, the regulators have already addressed this potentially thorny issue. Putting the client front and centre makes for an obvious answer – non-dealing clauses simply aren’t allowed. In some states non-solicitation clauses aren’t allowed either but perhaps that’s a little too liberal for the UK. That said, it would be surprising if any client in the UK would argue against the US stance on non-dealing and many, if not most, would surely be surprised that they could be prevented from dealing with their trusted adviser. Indeed, it might be the adviser they have dealt with for 20 years and to have that comfort forcibly removed raises ethical questions before we even get to fairness.
The UK’s regulatory wheels are turning a little slower in this respect but there has been recently renewed interest in ‘barriers to exit’ and this must surely come under this remit. If an adviser with a standard 12 month non-dealing covenant leaves a firm, the client who wishes to follow has few choices and only one that is realistic. They can transfer to another firm but this is temporary and will involve two sets of exit fees by the time they re-join their adviser of choice. Or they can stay as the captive of their existing firm, spending a year where they don’t want to be and paying charges they don’t want to pay. Good for the firm imposing the covenants but not much else.
They could ask the firm to release the adviser from the non-dealing covenant. Any decent firm would surely agree to this and it is interesting to note that Towry appears to be in this category and is leading the way as they have done exactly that after a recent request from two clients. Perhaps other firms may wish to take note. For those firms that refuse the request and hide behind the contract the client may have recourse to the Ombudsman. It would surely be a stretch to find non-dealing clauses to be in the client’s best interests or the continued taking of charges from a reluctant client to be in any way fair. Of course, the FCA could make this clear without clients having to resort to arguing with firms or approaching the Ombudsman, and perhaps now is the right time with the current focus on barriers to exit.
Raymond James has in incredibly low attrition rate amongst wealth managers, which we believe is down to excellent service and competitive terms. However, should a wealth manager wish to leave us, our policy is simple: the wealth manager is free to take their clients with them to their new firm. We believe our practice is clearly in the interest of the investor, and also gives wealth managers the freedom they require to establish and grow their businesses.
Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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