Entering a relationship with a network often brings new prospects for adviser firms.
However, while the opportunities ahead can be appealing, it is critical to carefully examine the exit terms outlined in the contract before signing.
Neglecting these terms can lead to significant challenges when seeking to leave the network; after all, plans, business priorities and network propositions can change.
Having the ability to move without being financially impacted or restricted should be high on anyone’s priority list.
If a firm decides to leave, it may be required to repay the ‘golden hello’ funds it received
This issue is not exclusive to networks — similar concerns can arise with any principal firm. The same level of diligence is required to safeguard your interests.
The importance of fully understanding your contract cannot be overstated. Far too often, advisers face obstacles or, in some cases, are entirely prevented from transitioning to a new principal due to the terms they agreed upon at the start of their relationship.
There is growing concern that some exit terms may be unfair or one-sided, making it prohibitively expensive to leave or restricting an adviser’s ability to operate. Although such terms can be legally challenged, doing so may be costly.
Financial penalties
A common issue is the imposition of financial penalties when advisers leave their network. These penalties can vary and, in some cases, severely impact the adviser’s firm’s ability to continue in its growth.
For instance, contracts may include a specified financial amount owed upon exit. While it may be reasonable for principal firms to recoup training costs if an adviser leaves shortly after qualification, this must be clearly stated in the contract. If not, such terms could be contested.
If you’re an adviser considering a new network, do your research, compare models
Another frequent penalty is the repayment of indemnity protection commission still under the clawback period, which may involve considerable sums.
Freezing of pipeline business
Another prevalent challenge is the freezing of pipeline business during the notice period.
This practice halts payments to the departing firm, causing cashflow difficulties and potentially jeopardising an entire operation. Although the former principal firm may understandably look to limit financial exposure during a transition, freezing income entirely can be disproportionately punitive.
The issue becomes even more problematic when combined with notice periods exceeding 90 days because this amplifies any financial strain.
Some contracts require advisers to provide notice periods of six months or longer. During this time, firms may be unable to move to a new network or operate independently, placing them in an uncertain and restrictive position.
It is crucial for firms to fully understand the terms they are agreeing to
Advisers should also pay attention to clauses that limit when notice can be given — some contracts stipulate that this may occur only during specific timeframes, such as
annually. Effectively, the latter can result in having an 11-month notice period.
Auto-renewing contracts can also present challenges. These agreements may bind advisers to unfavourable terms for extended durations, creating significant barriers to exit.
In some cases, networks retain a firm’s indemnity commission funds even after it has left and may even refuse to novate. This could cause unnecessary financial strain when combined with other unfavourable contract terms.
Novation is in effect a tri-party agreement between the previous network, the product provider and the adviser/firm or new network, where the latter agrees to take on all liability for that agency. The previous network can release the commission knowing that it has no responsibility for potential clawback.
Professional indemnity
Professional indemnity insurance (PII) run-off cover represents another potential financial burden for adviser firms.
As Cornerstone Finance chief executive Haydn Thomas points out, run-off cover requests range from the fair (even generous) to the ridiculous.
Advisers find it can be hugely beneficial to utilise a third-party consultancy when considering a change
“Ask the network how it is calculated if you can and, if it doesn’t make sense or feels excessive, then challenge. An industry norm/template would be a great development.”
Stonebridge recruitment director Lesley Sharkey takes a similar line.
She says: “This [run-off cover] should be reasonably priced, not extortionate. Sadly, we have encountered cases where firms are charged exorbitant fees, amounting to tens of thousands of pounds, as part of their exit process — an approach we find exploitative.”
The cover typically lasts for six years after an adviser/firm ceases practice or moves, meaning it protects against claims arising from advice given during their active period, even after they have moved or stopped working.
Although some state that liability for advice given under the principal’s oversight (and PII provider) should remain with the principal, some contracts shift this responsibility to the adviser upon their departure. Many argue that the PII in place at the time the advice was given, under the principal’s sales processes and oversight, should cover that advice.
Where contracts are unfair or overly restrictive, an independent solicitor may be able to challenge them
However, the simple answer is that it can be different with every principal firm. Each will decide how it treats leaving advisers and what it has agreed with its own PII provider. If it has agreed that advice will not be covered retrospectively, it may reduce the adviser’s overall PII premium.
The network/principal would then ‘recommend’ that the adviser take out run-off PII to cover any potential liability for advice given under their oversight. Again, many believe this to be hugely unfair.
It is essential to carefully understand how each principal firm handles this issue because practices may vary.
Anti-competition clauses
Anti-competition clauses that restrict firms from conducting similar business within specified timeframes or geographic regions can severely impact future opportunities.
Although such clauses are often successfully challenged in court, their presence in a contract can delay or complicate the exit process.
The bottom line is that reviewing and understanding exit terms is essential for adviser firms before committing to a network. Awareness of potential financial penalties, operational disruptions and restrictive clauses can empower advisers to make informed decisions and safeguard their long-term interests.
We have encountered cases where firms are charged exorbitant fees as part of their exit process
What may seem a perfect match at the outset could prove anything but further down the line. As Rosemount Financial Solutions chief executive Ahmed Bawa explains, networks may offer substantial ‘golden hellos’ to entice firms, but these come with strings attached.
“Firms are often tied to conditions such as minimum tenure, business targets or requirements to use the network’s in-house, often costly, investment products,” he says. “If the firm later decides to leave, it may be required to repay the ‘golden hello’ funds, leading to financial strain and turning the welcome into ‘golden handcuffs.’ It is crucial for firms to fully understand the terms they are agreeing to.”
Bawa continues: “Additionally, we have observed situations where networks block departing advisers’ access to CRM systems during the notice period, restricting their ability to manage client relationships or retrieve data.”
Putting pen to paper
Association of Mortgage Intermediaries (Ami) former chief executive Robert Sinclair stresses that Ami advises all advisers and firms to thoroughly read and understand contracts before signing.
Run-off cover requests range from the fair (even generous) to the ridiculous
“It is especially important to review the exit terms and, if needed, seek independent legal advice before committing,” he says.
Sinclair’s advice is fully supported by The Right Mortgage and Protection Network sales and recruitment director Amanda Wilson.
She says: “Advisers should always seek legal advice before signing any network or AR contract. Where contracts are unfair or overly restrictive, an independent solicitor may be able to challenge them as unenforceable or limiting one’s ability to trade.”
Wilson adds: “If you’re an adviser considering a new network, do your research, compare models and ensure you have the flexibility and fair terms needed to grow your business. Go through the FCA register and call firms in the network of your choice to ask for their opinion.”
Third-party support
Jonny O’Dea, director at financial services recruiter Integro Partners, also highlights the importance of third-party support.
“Although such measures shouldn’t be necessary, we frequently assist advisers by directing them to experienced solicitors and leveraging past experiences to provide support. This is why advisers find it can be hugely beneficial to utilise a third-party consultancy when considering a change.”
An industry norm/template would be a great development
O’Dea adds: “While the Consumer Duty is designed to protect and promote fair treatment for consumers, there should similarly be a commitment to ensuring advisers are treated with the same level of consideration and respect.”
Although it’s clear that some networks’ exit practices and clauses are unfavourable towards advisers, it’s important to acknowledge that both parties have their own interests to protect. Principals must safeguard against risks as businesses, while advisers and firms need to sustain their livelihoods and support their families.
Striking a fair balance is essential.
This article featured in the April 2025 edition of Mortgage Strategy.
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The post Feature: Understanding the challenges when exiting networks appeared first on Mortgage Strategy.