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FTC seal noncompete clauses PAUL J. RICHARDS/AFP/Getty Images

CEO: FTC Right to Ban Non-Compete Agreements

Our industry can do better, and both advisors and clients should expect more, writes Farther’s CEO and co-founder.

The Federal Trade Commission recently announced a monumental decision: outlawing non-compete clauses in employment contracts. The move is sending shockwaves throughout the business world—particularly in the wealth management industry, which has historically relied on these clauses to lock in advisors under threat of legal action. While the rule's future hangs in the balance due to potential legal challenges, it's time for firms to ditch these outdated contracts and let advisors freely choose what is best for them and their clients.

The wealth management industry encompasses over 400,000 professionals managing trillions of dollars of the nation's wealth. Big banks, national brokerage houses or registered investor advisor conglomerates impose non-compete, non-solicit, and non-accept clauses on many advisors. Typically, these agreements attempt to restrict an advisor’s ability to leave the firm, barring them from working as an advisor for years at a time or restricting them from aiding their clients at another employer.

A recent CNBC article outlining federal regulators' proposed rules featured the story of Ted Jenkin, a financial advisor who sold his practice in 2019. Ted found himself trapped in his RIA's non-solicit and non-compete agreement, which effectively barred him from working with any of his former clients or pursuing any other job in the industry, anywhere in the country, for five years.

"When you sell a business, essentially you're selling clients or ideas, but for you not to be able to work in this business makes no practical sense whatsoever," he lamented. What Ted initially saw as a golden opportunity in a burgeoning industry turned into a situation in which he could not even practice his chosen profession.

Ted is far from alone. Mergers and acquisitions within the RIA sector are up 20% compared to the same time a year earlier. This surge in activity might be exciting for the acquiring firms, but for the advisors who make up the companies being sold—often bystanders in these decisions—they can end up losing control over their businesses and their livelihoods.

The typical scenario plays out like this. First, decision-makers at the top of two firms agree to a sale and acquisition. Firms will keep advisor employees and clients in the dark until terms are agreed upon. Once the terms are announced, lengthy non-compete and non-solicit agreements are shared—sending many advisors out the door and to safer pastures, with the mindset it’s better to take your chances on a move (despite potential legal threats) than to lose your ability to ply your trade at another employer going forward. 

The thesis firms imposing these agreements argue is they deserve to retain clients (and more importantly, client revenue) because the firm has put in the work to develop those client relationships. However, that’s rarely the case. The advisors themselves—not their firms—painstakingly build and maintain personal client relationships. 

Financial professionals are often left to market themselves and cultivate their client base independently, in addition to their primary responsibility of managing clients' assets and offering personalized advice. We can see that the collective impact of firm-level marketing and brand at even the best-capitalized organizations does not meaningfully impact most advisors. If it did, 80% of advisors in Merrill’s old training program wouldn’t fail out after five years.

Even more damning, despite all the restrictions in place, when advisors do move, 80% of their clients make the move with them. Clearly, the thesis and current assumptions fail to hold water.

Non-compete agreements aren’t just damaging to an advisor’s freedom of association, they can also disrupt clients who trust that their advisor will act in their best interest. For instance, a financial advisor with the opportunity to transfer their clients' assets to another firm that offered superior technology, investment solutions and support would likely be restricted from making that move and achieving potentially better outcomes for themselves and their clients. In this case, it's not only the advisor who suffers but also the clients who entrust their advisor to safeguard and grow their wealth.

Advisors want to perform their jobs as effectively as possible for their clients. They’re limited in their ability to do so when firms compete on restrictions rather than on delivering great experiences and financial returns for their talent and their clients. Our industry can do better, and both advisors and clients should expect more. Thankfully, federal regulators seem aligned with the need for a very welcome change—not a moment too soon.

Taylor Matthews is the CEO and co-founder of Farther

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