Raymond James Investment Services, which won a court battle over two years ago in which it was accused of poaching clients from Towry, a rival UK firm, has slammed what it says is expanding industry use of restrictive covenants on advisors.

Raymond James Investment Services, which won a court battle over two years ago in which it was accused of poaching clients from Towry, a rival UK firm, has sharply criticised what it says is the expanding industry use of restrictive covenants on financial advisors.

The firm, part of US-listed Raymond James, polled clients and drew over 500 responses; it said the poll showed only 14 per cent of investors say a recognisable corporate brand is important and 92 per cent of them put a priority on personal relations with an advisor. It argued that the use of restrictive covenants “threatens to work in direct opposition to investor needs”.

Such a stance is a reminder of how Raymond James won a court battle in 2012 against Towry (formerly known as Towry Law) and a group of former Edward Jones advisors. Towry started legal action against the advisors, and Raymond James – their new employer – in 2011. Towry had acquired Edward Jones in 2009. The advisors left Towry shortly after that acquisition; Towry alleged they broke non-solicitation clauses in their contracts by contacting their former clients.

The issue highlights how, at a time when merger and acquisition activity is busy in wealth management in the UK and abroad, firms are thinking how to acquire and retain staff. There remains a debate as to whether clients are attracted more to the specific advisor or that advisor’s company “brand”. In a professional services area such as wealth management, where much of the value of a firm is tied up with its people, this can create knotty legal problems.

In its survey, Raymond James said that 92 per cent of respondents cite a personal relationship as being either “important” or “very important” to their needs.

“One of the drawbacks of the centralised model is its relative lack of flexibility.  Many of the larger banks are increasingly looking to drive scalability in their service offerings, so where private bankers might once have been servicing 20-25 top clients they may now deal with closer to 40-50, possibly more,” David Hazelton, head of business development at Raymond James, said in a statement about the results.

“As a result we are seeing more centralisation of the investment management process, for example by offering a prescriptive suite of products, rather than the bespoke service so highly valued by investors. Where market returns are no longer at the highs they once were, investors clearly value having a wealth manager who understands their changing needs and can offer in-depth, personalised portfolio management to deliver the best possible returns,” he continued.

With his business model very much in mind, Hazelton argued that 12 practices have joined the Raymond James business since the start of 2013 and he said a “key attraction” for these firms was a personalised level of service.  

“Yet despite this, one of the biggest obstacles preventing investors from receiving the high level of personalised service they desire remains the industry-wide issue around restrictive covenants. The FCA [Financial Conduct Authority] makes an indirect reference to this in a list of questions published on its website, specifically questions clients should ask financial advisors,” he said.

Cynthia Poole, director of relationship management and business support at Raymond James, added: “Restrictive covenants are a mainstay of the industry and we recognise the need for firms to have commercial protection. However, as the results of our client research make clear, non-dealing clauses often act in direct contradiction to the needs and wants of investors themselves and are the ultimate barrier to exit for many. In practical terms, until the non-dealing covenant expires, clients are left shackled to a firm they would rather leave.”