Skip navigation
regulatory panel.jpg

MarketCounsel: RIAs Beginning to Emulate Broker/Dealers With Noncompetes

As more advisors move to RIA affiliations, the firms are beginning to replicate their broker/dealer counterparts in terms of legal restrictions on advisors, according to Hamburger Law Chief Litigation Officer Sharron Ash.

Increasingly, advisor departures and transitions are not from the broker/dealer world to independence, but between RIAs themselves. Now many of the legal challenges that sought to restrict advisors on the broker/dealer side of the industry are starting to be implemented by RIAs, according to Sharron Ash, the chief litigation counsel for Hamburger Law, during the MarketCounsel Summit in Las Vegas this week.

A growing issue is client noncompete orders, in which an advisor at an RIA is restricted from bringing clients with them when they move to another firm.

Those restrictions can be for a certain length of time or within a specific geographic range. In some cases, employers argue departing advisors can’t tell the clients how long the noncompete restrictions will last. And as RIA M&A increases, those restrictions are being baked into transaction documents, Ash noted. 

The restrictions, common among FINRA-regulated firms, are a sign of a maturing industry, as well as a result of more professional buyers and investors in RIAs.

“What private equity firm is going to come in and purchase a firm for any of these very high multiples or infuse money into a firm and not want to have protection in the back end that someone is not going to become dissatisfied and walk out the back door with the very assets that have either just been infused with an investment or have been acquired?” she said.

Partnerships between advisors and the firms they join are not inherently a “forever marriage,” Ash said. Transactions on the RIA side feel more personal than a move from a large b/d into independence, and leaving an RIA can look more like a “bad divorce,” particularly if the advisor is leaving a family-owned business. 

Private bank transitions carry their own complications, as clients can be “stickier” to the bank, and a bank may leverage that to keep clients tied to the institution rather than their advisors.

Legally, the noncompetes aren't ironclad as firms can't restrict an individual client from making a choice about who to work with. If disputes reach the litigation stage, courts are increasingly attuned to clients’ freedom of choice, while still recognizing that signed contracts can’t be invalidated outright. 

“How do you balance the restrictiveness of something like that and still protect the clients who shouldn’t get caught in the crosshairs of a dispute, just because their advisor decided to make a move?”

TAGS: Industry
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.