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Non-compete clauses are increasingly out of favor politically , but larger RIAs are holding on tight . By Jennifer Lea Reed

Employment contracts vary wildly among RIAs , say the lawyers and recruiters who see large numbers of them on a regular basis . The details often depend on the origins and culture of the firm , its size , its ambition , and whether the advisor in question started their career there or joined from another firm with an existing book of business .

“ Some firms surprisingly have no employment contracts and are very loose . There , the team can move whenever they want to ,” says Louis Diamond , president of recruiting firm Diamond Consultants in Morristown , N . J ., and a nextgen leader himself . “ Others have a ridiculously aggressive employment agreement that takes their desire for control too far , and then you see everything in between .”

Brian Hamburger , chief counsel at Hamburger Law Firm in New York , agrees , adding that the structure and culture of a firm plays a huge role in whether restrictive covenants such as non-compete restrictions and non-solicit restrictions will appear in an employment contract at all .

“ Many independent RIAs are really beginning to get serious about putting employment agreements that contain restrictive covenants in front of their employees . As RIAs are spending more money on things like training , helping people earlier in their career and investing in their brand , they have an asset that ’ s growing in value that they need to protect ,” he says . The firms don ’ t feel as protected if they are overseeing nothing but a loose amalgamation of advisors who are just out to eat what they kill and have no loyalty to the firm , he says .

The question becomes more crucial for a nextgen advisor whose firm is thinking of selling out to private-equity backed consolidators . If the younger advisor would rather bolt than stay with the aggregator , their first step is to read their employment contracts and look for restrictive covenants . The second step — most likely with the help of a lawyer — is to figure out whether those covenants are enforceable .

The dreaded “ non-compete clause ,” for example , is both the most feared and the most contested covenant professionally and politically , so much so that many believe it ’ s headed for extinction .

Some U . S . states and the Federal Trade Commission have come to view non-compete clauses as antithetical to open competition . Currently , four states — California , Minnesota , North Dakota and Oklahoma — have banned non-compete clauses

NOVEMBER 2023 | FINANCIAL ADVISOR MAGAZINE | 25