Guy Holwill – CEO of Fairbairn Consult
A restraint of trade is a legal agreement, whereby you agree that you will not compete against a company for a specified period if you leave.
They are typically used to prevent competitors from headhunting staff with scarce skills or executive management who have a deep understanding of the company’s strategy. In some cases, the company will pay you to agree to the restraint, but in others, it is merely part of the terms of joining that business.
From an adviser perspective, restraints of trade are normally used for one of two purposes. The first is when the FSP has a corporatized business model, where they use the advisers to acquire clients/assets, and the clients always remain the property of the FSP. Whilst this is a completely valid business model, it is important that you understand the implications of joining a business like this. The second is where the brokerage uses this as a mechanism to circumvent the regulations that disallow the payment of sign-on bonuses – which sounds great at the outset but has real consequences as you will see.
In both cases, the restraint usually takes the form of a restraint against advising the clients of the first FSP if you move to a second FSP – even if the clients contact you and ask for you to advise them. Typically, restraints are effective for up to two years.
There can also be restraints that prevent you from working as an adviser in a particular location. Some even go as far as preventing you from working as an adviser for a certain period – although these may be overridden by a court of law as being unreasonable if you have the time and money to challenge it.
The good – for the company
In the case of a corporatized business model, the brokerage owns the client relationships, and they implement restraints of trade to protect themselves if an adviser leaves. In some cases, the advisers are not even aware of what they have agreed to (who reads all the terms and conditions?).
So, before you sign any contract, check whether there are any restraints against you if you choose to leave one day. If there are, be sure that you understand the implications of these terms before you sign the contract because they always favour the brokerage and can have nasty consequences for you and your clients.
The bad – for advisers
If you leave a brokerage and there is a restraint against the clients, you will not be able to sign the clients over to your new FSP and you will have to give up that revenue stream. Depending on the terms of the restraint, this can either apply to all your clients (including those that you signed over when you joined the brokerage), or some of your clients, such as new clients that you signed up after you had joined the brokerage. Again, it is important that you read the detail in the contract.
In the case of corporatized brokerages, this is something that will usually be made very clear from the outset because of the nature of the business. However, in the case of businesses skirting the sign-on regulations, the restraint may be positioned as an upfront payment, without going into any detail of the consequences of what happens if you leave.
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Airbnb, Uber, and Netflix disrupted the industries that they now dominate. Regulation is disrupting our industry by restricting some businesses and making compliance more onerous.
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We are a licensed FSP and a member of the Old Mutual Group.
The ugly – for clients
Regardless of the reason, restraints can have a negative impact on clients, and it would be interesting to challenge them in terms of Treating Customers Fairly. This is easiest to understand if you consider an example where you have a close friend as a client and that you’ve been advising them for several years. You move to a new FSP that has a restraint clause in their contract and you sign your friend across because they want to work with you.
A few years later, the business changes its remuneration model in a way that negatively impacts you, so you set up your own brokerage as an independent adviser. If the old FSP enforces the restraint, you will not be able to sign your friend across to your brokerage.
But here’s the thing. The client never agreed to the terms of the restraint (they were probably not even aware of it), and now they can no longer have the adviser of their choice. Instead, they will have to accept another adviser from the brokerage or find a new adviser from a different FSP.
Better disclosure will help
Financial planning is about building long-term relationships with clients. Whilst the FAIS Act makes it clear that clients belong to an FSP and not an adviser, most clients don’t understand this and can easily think that their relationship is with the adviser and not the FSP. To mitigate this confusion, should advisers who are subject to a restraint be required to disclose that the client is building a relationship with the business and that they will not be able to move with the adviser to another FSP?
Key take-outs
It’s easy to sign a restraint of trade when someone is offering you a job and even easier if they are paying you to agree to the terms of the restraint. However, this can have serious implications for you and your clients if things don’t work out, so think carefully before you agree to any restraint of trade.
In all cases, read the entire contract and seek legal advice if anything is unclear so that you make an informed decision when you join a business.