YOUR BUSINESS
entirely , and New York will join that roster in 2024 . Other states , including Colorado , Illinois , Maine , Maryland , New Hampshire , Oregon , Rhode Island , Virginia and Washington , have restricted non-competes , which are often tied to a compensation threshold . Iowa and Kentucky limit the use of noncompetes to certain professions .
Meanwhile , the FTC may ban them nationally on the grounds that they stymie competition , are exploitative and coercive for employees and are unnecessary in light of other restrictions . The agency also thinks that industries from fast food to medicine would be more innovative and prosperous without them . Instead , it says , employers can protect themselves with the other robust tools they have at
hand : non-disclosure agreements , trade secret laws , retention incentives for employees and employment contracts of fixed duration in which the employers can recoup their training costs .
The vote by the commission on a possible non-compete ban is scheduled for April 2024 .
When firms continue to stand behind non-compete clauses that may not be enforceable , clients are essentially up for grabs , and that can lead all parties to sink to various levels of undignified behavior . If it ’ s an RIA and an employee advisor leaves , the firm is going to aggressively court those clients , says Jodie Papike , CEO of recruitment firm Cross-Search in Encinitas , Calif .
The firm doesn ’ t even have to sue the advisor . It could instead launch a massive outreach campaign to the advisor ’ s clients “ saying who knows what ,” Papike continues . The firm can ’ t legally say anything inaccurate to the clients , she says . “ But there ’ s a lot of nuance in those conversations where they could raise doubt in the clients about where the advisor is going or what they ’ re doing or what happened and why they left . There ’ s all types of things that can happen to slow down an advisor taking their book with them if they don ’ t own it outright .”
All that campaigning , however , is expensive and disruptive , so it makes more sense for firms to build in procedures to let an advisor leave on good terms . That ’ s a trend Papike says she ’ s seeing more of .
Another way an RIA firm can handle the problem up front is by allowing a new advisor to leave with the same clients they arrived with , carving out that business so those relationships will never be contested . Or the firm can buy
Achieving an advisor ’ s loyalty without putting them in handcuffs may seem like an elusive trick , says My RIA Lawyer ’ s Leila Shaver , but she adds , “ It depends on the business and culture you want to create .”
the advisor ’ s book of business outright in exchange for a non-compete or nonsolicit provision . ( Right now , books are selling for 1.5 times to three times revenue , Diamond says . Otherwise books can be valued on an EBITDA basis , and the advisor can receive that value in firm equity .)
Fixing the issue of client ownership after the fact is more difficult , though not impossible . According to Laurence Landsman , a financial services attorney and partner at Landsman Saldinger Carroll in Chicago , even if the jilted advisory sues the advisor , it ’ s always possible to hash out a settlement between the two parties , as long as the advisor had set the stage for this during the recruitment process .
“ The new firm can pay the old firm a percentage of the revenue generated from those clients for some period of time to sort of grease the wheels and make it OK ,” Landsman says . “ The new firm is saying , ‘ In recognition of the fact that there were restrictions , we ’ ll pay you a certain amount of money that ’ ll be based on the revenue that ’ s generated from the moving clients .’”
Whether or not the law comes down on non-compete clauses , some sources say the industry is meanwhile undergoing a cultural shift where , as next-gen advisors start their own firms , what ’ s acceptable in an employment contract might be changing anyway . “ We tell firms now to really think about their non-competes and non-solicits ,” says Leila Shaver , founder of My RIA Lawyer in Alpharetta , Ga . “ If you want the really good people , the A players , you have to consider if you want those [ contracts ] at all .”
The founders of an RIA may feel more comfortable with restrictive covenants in place , she continues . But these do nothing to address what would actually make a next-gen advisor happy or otherwise prompt them to eye the exits .
“ Don ’ t even bother giving equity . It complicates the business ,” she says . While advisors want part of the profit , she says , “ they don ’ t want to be putting in money if the business goes sideways .”
Achieving an advisor ’ s loyalty without putting them in handcuffs may seem like an elusive trick , but , as Shaver says , “ it depends on the business and culture you want to create .” Offering strong salaries , bonus potential and profit potential is a great starting point .
“ The clients belong to the firm , the marketing is all done by the firm , and that can be successful for both the firm and the advisor ,” she says .
Despite the changing attitudes , however , there are still enough old guard RIAs who will want to keep restrictive covenants in place for a while yet , as long as they ’ re legal . “ Incentives only go so far when you ’ re in a labor market that ’ s so tight , and employers are increasingly concerned that there ’ s no end to those incentives ,” Hamburger says . “ You want people to be in their seat for the right reason , but just in case that reason isn ’ t enough , you want to have the legal remedies in place to protect your firm .”
26 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2023 WWW . FA-MAG . COM