The Federal Trade Commission’s ban on non-compete contract clauses may not be a seismic shock to the wealth management space but would principally affect advisors in the bank and wirehouse world as opposed to RIAs, according to several industry experts.
While many larger firms have moved away from including non-compete clauses in contracts because of questions about their enforceability, there are likely “thousands” of agreements still in place with such language, according to David Abell, an Albuquerque-based managing attorney at Abell Law.
“I can tell you it’s not uncommon, especially for banks, to tie the hands of the advisors by using non-competes,” he said.
The FTC voted 3-2 last week to adopt a comprehensive ban on non-compete provisions that would stop employees from moving to separate companies within the same industry, following an executive order issued by President Joe Biden urging the commission to limit the practice.
The ban would affect existing non-compete clauses and prevent companies from issuing them in the future. The FTC estimated about 30% of American workers (or 18 million people) currently have non-compete clauses.
In a statement about the final rule, FTC Chair Lina Khan said it would give American workers the freedom to pursue new jobs, businesses and ideas.
“Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” Khan said.
The Chamber of Commerce already filed a lawsuit to stop the ban from proceeding. MarketCounsel CEO Brian Hamburger predicted that the rule was “unlikely” to ever go into effect, suspecting courts would rule the FTC lacked congressional authority and overstepped its mandate in issuing the ban.
Even if the rule survives, Hamburger predicted it would have “little impact” on the securities industry, stressing 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 particularly tricky for companies to include non-competes in contracts.
“It’s not like it is in banking where there’s a handful of firms the employer restricts you from going to,” he said. “Here, you’d have to come up with a pretty long list if you want to identify all of the firms that are able to compete.”
Practifi CEO Adrian Johnstone echoed Hamburger’s assessment that non-solicitation agreements were typically more frequent in the industry, particularly in the RIA space. When non-competes are at play, it’s typically because of geographic proximity, he noted.
However, Johnstone tended to see them more in the wirehouse space, which he said had “a tendency to be a bit more protective” of employees. Wirehouses often hire advisors earlier in their careers, and Johnstone speculated they may feel more emboldened to impose more restraints.
“When you look at advisors in the industry, the largest movement in the industry for advisors is wirehouse to wirehouse,” he said. “So they’re trying to lock everything down as tightly as possible.”
Clint Walkner, a managing partner and financial advisor with the Wisconsin-based firm Walkner Condon, worried about the implications of a ban. At Walkner’s firm, employees with “client-facing, lead advisor” roles have non-compete clauses in their contracts.
Walkner said he’d seen such clauses, typically coupled with non-solicitation agreements, throughout the industry. He feared if the ban stayed in place, an advisor could leave their practice and open a shop across the street.
“In my example, if somebody were to put their shingle across the street from you, is that solicitation or not?” Walkner asked. “If they announced on LinkedIn that they moved to their new XYZ Financial Planning Firm, across the street from their prior employer, is that solicitation or not?”
According to Walkner, non-compete clauses are most often in place to protect a firm’s business-generating strategies. If someone is cold-calling potential clients and drumming up their own clientele, it would be one thing, but he said firms would want to protect themselves if their marketing engine generated leads.
According to CEO and co-founder Taylor Matthews, the fintech firm Farther opts not to use non-competes, saying the firm’s role is to help advisors by offering them “the freedom of association.” Matthews said most larger firms in the industry employ non-solicits, but many of the biggest RIAs, discount brokers and B/Ds still use non-competes and non-accepts (which allows departees to accept old clients but not solicit them).
In an email response to questions from WealthManagement.com, Matthews said the ban was “a huge step up in advisor freedom,” allowing reps to find better environments for themselves and clients.
“In worst-case scenarios, these agreements can bar advisors from working as an advisor for years,” Matthews wrote. “This coincides with the industry-wide rise in mergers and acquisitions, which often render advisors bystanders in decisions that could upend their businesses and livelihoods.”
Abell is currently representing a financial advisor who wants to leave a bank to join an RIA contractually restrained by non-compete language. He suspects some firms opt to keep non-compete clauses in contracts because they instill uncertainty and fear in advisors even if a court finds them invalid.
“Just the threat of having that non-compete is more than enough to keep those advisors and brokers in-house,” he said. “You need to have the financial resources to fund litigation, and that’s not cheap.”
Abell said most brokers and advisors calling him after the ban was announced were interested in whether their current non-solicitation agreements were also impacted (for the most part, they would not be unless the agreement was framed in such a way that it was a de facto non-compete clause).
The FTC also carved out an exemption for “senior executives” whose non-compete clauses could still apply. The commission defined those executives as employees earning more than $151,164 annually and in “policy-making” positions. While Abell thinks most advisors would qualify based on salary, the other stipulation would leave them out.
“If you’re not making policy decisions for the firm, that exception does not apply,” he said.
For now, Walkner said his firm wouldn't change its contracts, opting to wait and see what happens with the pending litigation.
“I would think that it would allow people to move easier,” he said. “And from an employer standpoint, it would be a more difficult hurdle for us as far employment contracts, in how we hire and retain employees."
