Thinking of becoming an Appointed Representative – beware the small print

One of the benefits of making the move from traditional account executive to appointed representative is the ability to build and nurture a client book all of your own. The value in a book of loyal clients is well understood in the market, and becoming an appointed representative can allow individuals with client skills to harness that value and make it work for them. You might be building a family business to hand down the generations or expanding your retirement fund – whatever your plans, building your own business can be a great way to get the maximum reward for your skills both in financial and accomplishment terms. The appointed representative model makes this especially simple as there are reduced overheads and significant scope for growth and development with other AR businesses.

But what if when all your hard work starts to pay off, you discover that reaping the rewards might be a costly, or even impossible, process? We’ve come across a number of variations of the AR contract and they can be complex and difficult to interpret. Client ownership is always a tricky subject (can anyone really own a client?) but what is clear is that if a covenant or other contract term prevents you from dealing with your dependable client base then they have no value to you and we see people giving this value away all the time.

The most common contract variations we see are:

Should you wish to take your clients elsewhere, that’s fine, you can buy them back from your principal firm for a fixed fee or a percentage of income – sometimes both. The fees can be high and contracts one-sided. Paying a fee to exit may not seem an issue when you’ve built up a large valuable book but if things don’t work out and you want to move to a different principal, the costs could make that tricky.

Often used by the larger brokers who are working with AR’s as a sideline, these contracts make it clear that you are free to take your clients should you wish to leave but whilst under contract, your clients become familiar with the broker brand and additional support team that they provide (their account handler and claims support) so when you come to leave, the book is worth very little without the central support and corporate brand behind you. Establishing your own brand is, in our view, an essential element of business – you don’t want to work hard to support someone else’s!

We have come across a surprising number of people who believe that they are an appointed representative when, in fact, they are not. Sometimes they are set up as a trading name or a subsidiary of their principal firm – if you want to check your AR status you can do so with a quick search on the FCA Register. Unless the issue of client ownership is dealt with explicitly in any contract, in this scenario the clients are likely to belong to the main firm and be subject to normal covenants.

A good AR contract will make it clear that they are and will always remain your clients. In order to meet FCA requirements, it will need to include protection for the principal, should they need to take control of the clients for any reason, but that is only in exceptional circumstances. We would also recommend servicing them under your own brand so that they buy into you, rather than a corporate entity.

If you’ve got the client ownership sorted then there are a couple of other things that you should look out for in your appointed representative contract. Hold-harmless clauses and open ended liability should be avoided and you should check to see what responsibilities your principal has to help ensure a smooth transfer should you wish to leave. Will they provide access to your client data? Will they agree a block transfer? Unfortunately these are the kind of questions that no one thinks about until you need them and then it’s too late.

Our advice would always be that if you aren’t sure, seek some legal advice. It shouldn’t cost the earth and it could save you thousands in the long run. In any event as a rule of thumb, if the contract seems overly complex you would be right to be concerned – after all in a genuine partnership the contract should be equally balanced.

At Momentum there are no hidden costs, the clients are always yours and we have tried to make the contract as simple as possible – after all successful partnerships are based upon common interests and understanding.