Wealth advisers and company owners clash over non-compete clause bans

Financial Advisors

Financial services firms and associations say the proposed federal ban on non-compete clauses will disrupt business models that reward maintaining good customer relationships for years, if not decades. It warns that it may

However, many individual advisors view non-compete clauses differently. As a barrier to continuing to serve customers as they transition from one employment situation to another.

Both stances stood out About 27,000 comments The Federal Trade Commission has received a ban on contractual provisions barring employees who have left their employer from working for competitors within a specific geographic area.

Fair Trade Commission introduced the proposal in January The federal agency said it would consider everything it receives before making a final decision.

Most of the discussion of proposed bans by consumer watchdogs centers on how workers in industries ranging from sandwich manufacturing to medicine to software engineering benefit from eliminating non-competition. I’m here. The FTC estimates that one in five U.S. workers (about 30 million) are covered by the covenants, and banning them would increase employee earnings by $296 billion annually. .

But the proposed ban gives some in the wealth management industry reason for a pause.

said John Laughlin, CEO of Summit Asset Management, a fee-only advisory firm in Memphis, Tennessee. I wrote to the FTC on January 18th: “We entrust our clients to advisors who work for us and rely on non-compete agreements to prevent those advisors from going out with our clients.”

Laughlin, who was contacted by phone, said his firm’s employees had been asked to sign both a non-compete clause and a non-solicitation clause barring advisers from contacting former clients after leaving the company. Yes. According to Laughlin, Summit Asset Management’s non-compete and non-solicitation provisions are in effect for one year after an employee leaves the company.

I’m not telling them, “If that’s your dream, you can’t be in this industry. We have this time frame.”

The FTC’s proposal does not extend its prohibitions to non-solicitation clauses. This fact may blunt the impact of prohibitions in the wealth management industry, where non-solicitation clauses are much more common than non-compete clauses.

Elias Young, a financial adviser at Wellspring Financial Partners in Tucson, Arizona, said he would have to follow a two-year no-solicitation clause if he left his current employer. Fortunately for him, he has no plans to go to the exit.

Although he has only been with the company for four years, Young says he has already amassed a considerable amount of business.

“You’re going to have to really take a step back to get anywhere,” he said.

of Comments filed with the FTC on January 19, Young writes, that advisors can be “functionally handcuffed to the firm that built the business in the first place through unsolicited contracts.” Mr. Young said the burden imposed by non-solicitation and non-compete clauses increases the longer he stays with the company.

He suggested that it would be fairer to advisers if companies allowed them to continue to solicit clients they brought in entirely on their own, without the help of colleagues. We acknowledged the difficulty in allocating credit for client recruitment.

Mr. Young also questioned whether this clause conflicts with the advisor’s fiduciary duty to always put the best interests of the client first. If an advisor leaves the company because he or she has doubts about how the business is run, shouldn’t the client be obliged to make their concerns known?

“Or what if the company changes ownership and the new owner running things isn’t that great?” Young said. “You are still tied to this company and there is nothing you can do.”

In a statement filed on January 18,a commenter identified as Urban Fleming made a similar point.“A lot has been done in the Department of Labor and the SEC to put the customer first, but non-competition is inherently a conflict of interest. ’” Fleming wrote.

Organizations such as the Alternative Investment Management Association, the American Financial Services Association, the Financial Services Institute, and the Securities Industry and Financial Markets Association warn of unintended consequences. These groups and other trade representatives Coalition letter of April 17 “Non-competition serves the interests of pro-competition,” it argues.

“Courts, academics and economists have all found that non-competition promotes investment in employees and helps protect intellectual property,” the letter said. “Across all sectors of the economy, employers rely on non-compete obligations to protect their investments in the workforce, protect trade secrets and other confidential information, and structure compensation programs.”

The FTC’s proposed non-compete clause prohibition contains one important exception. A company owner who owns more than 25% of his stake in the business may be subject to contract clauses that prohibit him from working for a competitor. This type of contractual clause tends to be triggered in the wealth management industry after one company is acquired by another, with the purchaser ensuring that the newly acquired business does not move out with the previous owner. I’m trying to make sure

and Letter filed with the FTC on April 17the Investment Advisers Association said the proposed exception to the ban is good but could go further. It argued that non-compete clauses should still be allowed for those who enter into partnership or shareholder agreements with company principals.

The IAA also argued that the FTC’s proposal should only bar new non-compete clauses, rather than requiring the dismantling of old clauses, with companies having 18 months to comply. The IAA acknowledged that the proposal would not apply to the non-solicitation clause, but argued that the exemption should be explained more clearly.

Laughlin of Summit Asset Management said the no-solicitation clause is really important to him. He believes the terms of the contract allow the company’s three partners and six employees to work together and not be particularly territorial about their work. All together, given a good reason to worry that the books of one’s business could be out the door, it can all come under scrutiny. He said it would also help protect small businesses like the company from predatory recruitment by larger rivals.

“Our industry is highly competitive and barriers to entry are so low that any loosening of the relationship foundations on which our business is built poses a serious threat to our long-term viability.” Laughlin wrote in comments to the FTC. “Instead of increasing competition, small businesses like ours could be forced to sell to consolidators or risk being completely shut down in the future.”

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