As Invesco Perpetual prepares for the departure of its star manager Neil Woodford, Rebecca Jones takes a look at how advisers can manage the risk of a key person leaving their firm.
As any business owner will tell you, a firm’s most important asset is its people. Conversely, however, this means that they are also a firm’s biggest liability, particularly when they leave. The loss of a key person can be a real blow to a firm’s finances, confidence and company image.
Financial advisory firms are particularly vulnerable to key man risk as the nature of advice often means advisers have personal relationships with their clients, who will often follow the adviser out the door. Despite this, there are measures advisers can take to mitigate the damage the departure of a key member of staff can cause, if not prevent it completely.
The first thing to do, according to head of financial planning at Hargreaves Lansdown Danny Cox, is figure out exactly how the departure of a key person might affect your business.
How to manage key man risk within your business
“The starting point is to determine who the key person is, what skills, knowledge, experience and connections they have and how the loss of that person could impact on profitability, both in the short and long term,” he explains.
The most obvious people to assess will be those in senior positions; however, Cox also recommends looking at members of staff with specialist IT knowledge, for example.
If you realise that the loss of a person could cause significant damage to your firm, you should then think about putting measures in place that will help to make that person a little less indispensable.
Dave Penny, managing director of Invest Southwest, recommends a watertight record management system.
“It is all about having robust processes in place, which run independently of any one person. Every interaction with a client or their case must be consistently and uniformly documented,” he argues, adding that a paperless management system is best for this.
Managing director of Montfort International Geraint Davies agrees, adding that accurate record keeping is particularly essential for advisory firms that cannot simply “plug and play” when a key person leaves.
However, in addition to record keeping, Davies also insists that key skills should be shared among the workforce.
“If somebody has specialist knowledge, you have got to do cross-training and make sure that no one is building their own little empire,” he says.
While helping to ensure no one person is indispensable, Davies says that cross-training will also strengthen the firm as a whole by improving staff knowledge, confidence and, often, morale.
Reducing client loss
The most difficult thing to address when it comes to spreading duties and responsibilities within an advisory firm is the client-adviser relationship. If, like Penny, your business model promotes one-to-one advice, you will likely find it difficult to stop a client leaving with their adviser.
“The ‘advice for life’ mantra we have is all about one person delivering a lifelong solution for an individual. For us, this means that, if the individual leaves, we will not stand in the way of the client if they want to go. There is nothing you can do to stop it,” he explains.
You can, of course, write ‘non-solicit’ clauses into advisers’ employment contracts stipulating that they cannot take clients you have introduced to them when they leave your employment. Penny, however, argues that these are “borderline unenforceable”.
As an example, he cites Towry’s February 2012 lawsuit against seven advisers who left the company after it acquired Edward Jones in 2009, taking £33m worth of clients’ investments with them.
Despite Towry’s claims the advisers had broken the terms of their contracts by contacting their former clients, the judge ruled that the case against them and their new employer, Raymond James, did not “withstand scrutiny”.
For Davies, who is less sanguine than Penny when it comes to losing clients, the key to retaining business when an adviser leaves is ensuring that, throughout the advice process, the client does not become dependent on any one adviser.
“You have got to do what you can to build the firm and not the individual in clients’ minds. You have to build up the brand so it is bigger than the individual,” he explains.
Davies explains that most staff at Montfort are in some form of contact with clients either directly or indirectly, which helps the client to recognise there is an entire team behind their advice, not just one adviser.
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