Wednesday, January 02, 2008

You Don't Own Me... with apologies to Lesley Gore

On a forum that I participate in there is a wonderful discussion developing which deals with how an investment advisory firm can prevent or make more difficult for an existing client to leave the firm with the intent of becoming a client of another firm/advisor of their choice.

Yes you have read that correctly, a discussion took place on how to place a roadblock on people that should have free choice in their selection of an advisor.

What makes this more interesting and in my opinion perplexing is that it is taking place in the forum of an organization whose leadership advocate full disclosure and fiduciary responsibility.

Allow me to ask this question of you. Would you do business with a firm if they told you up front that should the relationship not meet with your satisfaction that you may be unable to deal with the advisor of your choice in the future?

Now no one is suggesting that a representative of Don Corleone will be paying you a visit or that you may wake up to find the severed head of your favorite pet at the foot of your bed. That happens in Hollywood, what we are talking about happens right here, in Your Town, USA.

The online discussion started with a question on adding non compete clauses into contracts and also how to put a dollar figure on the client which according to some, is the property of the firm. Later upon realizing that ownership of a person is politically incorrect the term was changed to “client relationship”. Yet in reality they are one and the same.

Now we have all read about non-compete / non-solicitation clauses where important people usually cannot enter a similar business or talk to clients after they have left their employer however it is usually associated with expensive manufactured goods; goods that have required extensive research and development dollars to be spent. Industrial companies expect that their employees and the employees of the competition be covered by non-compete clauses. However I know of no instance where Boeing has allowed a salesman to join Airbus for a fee. After all how do you really value the future business of an airline?

It is not being said that non compete clauses are illegal, there has been enough case law to show that they can be enforced. However, when people are advocating full disclosure to potential clients I would hope that on at least an ethical if not moral standard that it would be disclosed to a potential client that they may be waiving some rights in the future.

Some fee only advisors are very critical of investment products that have back end surrender charges. They feel that it is simply wrong to penalize or place obstacles in the way of an investor who wishes to cash out. I cannot think of anything more penalizing than preventing a person the freedom of choice just because they are an ex-client of the firm.

The lesson to be learned is to ask your current advisor if they will place any impediments in your selection of a replacement advisor, and have them put it in writing!


Anonymous said...

I never knew this. Do you mean that after a few years of being a client that if I want to leave my broker and go to another broker that I may be unable to? I like my advisor and would follow him!

Morris Armstrong CFP, ChFC, CDFA, AIF, EA said...

If your broker or advisor wants to leave his firm to go to another, and then you decide that you want to retain YOUR relationship with him, the old firm may place roadblocks in the way. This in all likelihood was not disclosed to you at the time the account was opened.

Anonymous said...

Everyone knows that non compete clauses exist. Why should we have to advise the client? Are you some kind of consumer activist?

Morris Armstrong CFP, ChFC, CDFA, AIF, EA said...

I would think that more people are aware of costs of an investment than legal agreements between parties. In other words I strongly disagree with your assumption that people are aware of the non competes/solicitations and how they may impact them directly.

Thank you, I am pro consumer and pro honesty.