According to some industry experts, the Federal Trade Commission's ban on non-compete clauses may not be a seismic shock to the wealth management space, but it would mostly affect advisers in the banking and wire worlds, as opposed to RIAs.
While many larger firms have moved away from including non-compete clauses in contracts because of questions about their enforceability, according to David Abell, an Albuquerque-based managing attorney at Abell, they likely still exist. “thousands” of agreements with such language. The law.
“I can tell you that it's not unusual, especially for banks, to tie the hands of advisers by using non-competes,” he said.
The FTC voted 3-2 last week adopt a blanket ban on non-competition provisions it would bar employees from moving to separate companies within the same industry, following an executive order issued by President Joe Biden asking the commission to limit the practice.
The ban will affect existing non-compete clauses and prevent companies from issuing them in the future. The FTC estimated that about 30% of American workers (or 18 million people) currently have non-compete clauses.
In a statement about the final rule, FTC Chairman Lina Khan said it would give American workers the freedom to pursue new jobs, businesses and ideas.
“Non-compete clauses keep wages down, stifle new ideas and rob the US economy of its dynamism, including from the more than 8,500 new startups that would be created each year after non-competes are banned,” Khan said.
of The Chamber of Commerce has already filed a lawsuit to stop the ban from continuing. MarketCounsel CEO Brian Hamburger predicted the rule is unlikely to ever go into effect, suspecting that courts will rule that the FTC lacked congressional authority and exceeded its mandate in issuing the ban.
Even if the rule survives, Hamburger predicted it would have “little impact” on the securities industry, noting that most restrictive covenants are not based on non-compete language. He said the fragmentation of the RIA space (and the wide range of available RIA employers) made it especially tricky for companies to include non-competes in contracts.
“It's not like in banking where there are a handful of firms where your employer restricts you to go,” he said. “Here, you have to come up with a pretty long list if you want to identify all the firms that are able to compete.”
Practifi CEO Adrian Johnstone echoed Hamburger's assessment that non-solicitation deals were typically more common in the industry, particularly in the RIA space. When they're not competing, it's usually because of geographic proximity, he noted.
However, Johnstone tended to see them more in the wire space, which he said had “a tendency to be a little more protective” of employees. Wire houses often hire advisers earlier in their careers, and Johnstone speculated that they may feel emboldened to impose more restrictions.
“When you look at advisors in the industry, the biggest movement in the industry for advisors is home to wire,” he said. “So they're trying to shut everything down as tight as possible.”
Clint Walkner, a managing partner and financial advisor with Wisconsin-based firm Walkner Condon worried about the implications of a ban. At Walkner's firm, employees in “client-facing, general counsel” roles have non-compete clauses in their contracts.
Walkner said he had seen such clauses, usually accompanied by non-solicitation agreements, across the industry. He feared if the ban remained in place, a counselor could leave their practice and open a shop across the road.
“In my example, if someone were to place their shingle in front of you, is that a request or not?” Walkner asked. “If they announced on LinkedIn that they transferred to their new Financial Planning Firm XYZ, in front of their previous employer, is that a requirement or not?”
According to Walkner, non-compete clauses are most often in place to protect a firm's business generation strategies. If someone is cold calling potential clients and pushing their own clientele, that would be one thing, but he said firms would want to protect themselves if their marketing engine was generating leads.
According to CEO and co-founder Taylor Matthews, fintech firm Farther chooses not to use non-competes, saying the firm's role is to help advisers by offering them the “freedom of association.” Matthews said most of the industry's largest firms employ non-solicitations, but many of the largest RIAs, discount brokers and B/Ds still use non-competes and opt-outs (which allow leavers to accept old customers, but not solicit them).
In an email response to questions from WealthManagement.comMatthews said the ban was “a huge step forward in the freedom of advisers”, allowing representatives to find better environments for themselves and clients.
“In worst-case scenarios, these agreements can keep advisors from working as advisors for years,” Matthews wrote. “This coincides with an industry-wide increase in mergers and acquisitions, which often leave advisors on the hook for decisions that can disrupt their businesses and livelihoods.”
Abell is currently representing a financial advisor who wants to leave a bank to join an RIA contractually limited by non-compete language. He suspects that some firms choose to keep non-compete clauses in contracts because they instill uncertainty and fear in advisers even if a court finds them invalid.
“Just the threat of not competing is more than enough to keep those advisers and brokers in-house,” he said. “You have to have the financial resources to fund litigation, and it's not cheap.”
Abell said most brokers and advisors who called him after the ban was announced were wondering whether their current non-solicitation agreements would also be affected (for the most part, they wouldn't be affected if the agreement wasn't created at the time). so that it was a de facto non-compete clause).
The FTC also created an exception for “senior executives” whose non-compete clauses may still apply. The commission defined those executives as employees earning more than $151,164 a year and in “policy-making” positions. While Abell thinks most advisers would qualify based on salary, the other condition would leave them out.
“If you're not making policy decisions for the firm, that exemption doesn't apply,” he said.
For now, Walkner said his firm would not change its contracts, opting to wait and see what happens with the pending litigation.
“I would think it would allow people to move more easily,” he said. “And from an employer's point of view, it would be a more difficult hurdle for us in terms of employment contracts, in how we hire and retain employees.”