St James’s Place is facing tough questions over the lock-ins and sales incentives contained in its partner agreements.
Documents seen by Money Marketing shed light on the template terms financial planners could sign up to when joining a partner practice of the advice giant.
For a year after leaving SJP, advisers are not allowed to persuade clients to “cancel, surrender or terminate any financial product issued by SJP to the client” or “purchase or invest in a financial product which is of the same type as and/or substantially similar to the one available from SJP”.
They are also not allowed to make contact with any person who was a client or prospective client of the partner firm during the 12 month period before the adviser left, or “solicit, interfere with or endeavour to entice away from the partner practice or employ any person who was an employee or adviser of the partner practice”.
While this may be in line with what many financial planners are familiar with across the market, the restrictive covenants will face further scrutiny after a recent court ruling found that lock-ins placed on a former Quilter adviser were not legally enforceable.
Quilter’s terms prevented the adviser from working at a competitor for nine months after leaving Quilter, and from dealing with or soliciting Quilter clients for 12 months after the termination of her employment.
These were voided, however, after the judge ruled they were “not industry standard”, and were “unusual and not reasonably necessary” in order to protect any legitimate business interests.
An advice market veteran says they are seeing far more challenge to tie-ins as acquisitions activity continues apace across the profession.
“If employers turned the lens around the other way, and asked why a financial adviser, who should always be doing the best thing for their client, is trying to leave the business and go elsewhere, then maybe the issue of what the contract says would be one of enablement and enrichment of the adviser-client relationship, rather than entrapment and penalty,” they say.
In 2011, Towry famously attempted to sue Raymond James and seven former Edward Jones advisers for £6m in damages over alleged client solicitation, but ended up losing the case.
Another advice market veteran adds: “It’s a bit like a phone contract. No-one goes into it thinking they want to leave in the next 24 months, but then they realise something else comes along and they can’t do much about it and you do feel frustrated at that.”
An SJP spokeswoman says: “We undertake periodic reviews of our templates, so these clauses will be reviewed as part of that process in due course.
“The Quilter case turns on its facts. In that case, the individual was an employee whereas the majority of advisers are self-employed, and case law supports the position that a more onerous stance can be taken in business to business relationships.”
If its restrictions were challenged, SJP may have a legal workaround at any rate. Its template contract makes advisers explicitly agree that the termination clauses are “for the protection of the legitimate business interests” of the partner firm and are “reasonable in all the circumstances”.
If any one of the lock-in clauses is found to be unenforceable, either in whole or in part, the adviser agrees that the other terms could still be enforced by SJP.
The spokeswoman says: “SJP is not the contracting party to the agreement an adviser has with their partner. We have a suggested template as a guide, but there is no obligation on a partner or adviser to use it. It is up to each partner practice taking on advisers to consider whether the template clauses are appropriate in the circumstances.”
A nudge in the right direction
The partner agreement also brings issues around sales targets and incentive culture to the surface once more.
Advisers can be advanced part of their advice fees when the join an SJP partner firm. However, they are liable to pay these back if they do not meet a “total credit” level.
The document also shows the higher the adviser moves up the partner levels within the firm, the more of their initial advice fee they get to keep. Described as “production levels”, part of the way advisers move up this chain is through revenue generation.
SJP says that “the relationship is a commercial one, with terms that are commensurate with a business-to-business relationship”.
Yesterday, SJP confirmed it had suspended bonuses for centralised employees at the business due to current trading conditions. However, this did not apply to its advice force because it is self-employed.
The partner agreement repeatedly references that the adviser will be acting on a self-employed basis, with no holiday, holiday pay, pension rights, sick pay or any other benefits. They can pick their own working hours, but will be responsible for all of their own tax liabilities.
The wording is a strong riposte to challenges received by many ‘self-employed’ advisers that they should in fact fall under IR35 rules and be taxed as employees as the government clamps down firms minimising their tax bills by claiming full-time staff are in fact contractors.
The SJP spokeswoman says: “All SJP partners are self-employed so operate outside of IR35 and all run their businesses independently. Advisers are not operating as personal services companies, as envisaged by IR35, but as sole traders who are responsible for their own tax liabilities. Sole traders are not subject to IR35 but to the standard tax regime for sole traders.”
A complaints fee is also referenced, where a deduction is made against the cost of responding to or resolving complaints that falls directly back to the planner.
SJP confirms that this is in respect of professional indemnity cover, where self-employed advisers pay towards the business cost of the insurance.
While the adviser is branded an SJP “partner”, no legal partnership is formed under the template joining agreement.