Here’s a question. What happens to ongoing adviser charges if the adviser dies?

This came up recently when we were asked: “We have it written into our adviser contracts that the clients belong to the adviser.  We are considering an amendment to the contract along the lines of, if the adviser dies his estate will continue to receive 50% of ongoing advice fees.  Are there any compliance issues with this?”

Immediate thoughts ran along the lines of ‘you can’t ‘own’ a client – clients decide to stay or leave an adviser/firm so the basic premise of the question is, well, questionable!’

A little more thinking concluded that this, while true, missed the point. The comments about the ownership of the client are clearly correct – you can’t own a person, at least not in this country. That went out with slavery! However, it is clear what the ‘clients belong to the adviser’ contract term is there for. If the adviser leaves that firm then he or she can take the clients with him or her without any legal covenant hassle from the firm. That is just there for the sake of clarity and is a widespread and perfectly sensible practice.

However, if an adviser leaves a firm, he or she must jump through hoops of data protection and compliance to actually move the clients to a new firm and each and every client has the right to say no, to go elsewhere or stay with the existing firm.

But that does not negate the intent of the original contract term to reflect the worth of the client bank to the adviser, who after all may well have brought some or all of the clients to the firm in the first place.

But what if the adviser dies?

A good question and one which perhaps many  firms and principals have not addressed in their contracts with advisers. So, good question – but aiming to continue paying a proportion of the ongoing fees from the client bank is almost certainly the wrong answer, for the following reasons:

• To start with, COBS 6.1B contains the rules around adviser charging for providers and makes clear that providers can only facilitate adviser charges to authorised persons. So, the proposal is out of the question anyway if it was hoped that the process could be done by the provider.
• Of course, the firm could, if it wanted, continue to provide the ongoing service to the clients, continue to take facilitated adviser charges then make payments to ‘the estate’. But the ‘estate’ only exists until such time as probate is complete, at which point the assets would be distributed to the deceased adviser’s beneficiaries according to the terms of the Will. There could be many beneficiaries – would the firm really want to get involved in payments to multiple individuals? And each of those individuals would then have an income stream that would need to be continued to their beneficiaries? How long does the entitlement last? What are the IHT implications? How does the firm account for these payments in its accounts? It really is a non-starter.
• Finally, assuming that the adviser received 50% of the ongoing charge while alive, how could the firm afford to continue to provide a service to the clients. Presumably any ‘new’ adviser taking over responsibility for those clients would be entitled to a similar share as the deceased adviser had. It doesn’t stack up financially.

However, if the firm, as clearly appears to be the case, wishes to consider that the adviser is entitled to some agreed ‘value’ of the client bank in terms of that being an asset of the business, then the right answer would probably be to agree a valuation basis that will be used in the event of death and the firm then pays that to the estate.

Single adviser business

The issue covered here also has some application to a sole trader/single adviser scenario. There may be a locum arrangement in place – sensible but not a current FCA requirement (see here). But is there a contingency plan in place which specifically addresses what is to happen in the event of death?