Financial services companies and associations are warning that a proposed federal ban on noncompete clauses could disrupt business models that reward them for maintaining good customer relations for years, if not decades.
But many individual advisors see noncompete clauses differently — as barriers preventing them from continuing to serve their clients when they move from one employment situation to another.
Both stances figured prominently in
The FTC
Most discussions of the consumer watchdog's proposed ban have centered on how eliminating noncompetes will benefit workers in industries ranging from sandwich making to medicine to software engineering. The FTC estimates one out of five American workers — about 30 million people — is subject to the restrictive clauses and that banning them would raise employee earnings by $296 billion a year.
But the proposed ban is giving some in the wealth management industry reason for pause.
John Laughlin, the CEO of Summit Asset Management, a fee only advisory firm in Memphis, Tennessee,
Reached by phone, Laughlin said employees at his firm are asked to sign both noncompete and nonsolicitation clauses that prohibit advisors from reaching out to former clients after they leave. Laughlin said Summit Asset Management's noncompete and nonsolicitation clauses last for a year after employees depart.
"We're not telling them, 'You can't be in this industry if that's your dream,'" Laughlin said. "But you do have this window of time, where we're getting some protection based on the investment we've made in you."
The FTC's proposal would not extend its prohibitions to nonsolicitation clauses. That fact is likely to blunt the ban's effects in the wealth management industry, where nonsolicit provisions are far more common than their noncompete cousins.
Elias Young, a financial advisor at Wellspring Financial Partners in Tucson, Arizona, said he would have to abide by the terms of a two-year nonsolicitation clause if he were to leave his current employer. Fortunately for him, he has no plans to go for the exit.
Young said that although he has been at the firm for only four years, he's already managed to amass a substantial book of business.
"I'd have to take a real step back to go somewhere else," he said.
In
He suggested it would be fairer to advisors if firms allowed them to still solicit clients they had brought in entirely on their own, without help from their colleagues. But he acknowledged that assigning credit for client recruitment could prove tricky.
Young also questioned if the clauses clash with advisors' fiduciary duty to always put their clients' interests first. If an advisor leaves a firm because of questions about the way it does business, isn't their obligation to let clients know about those misgivings?
"Or what if the firm changes hands and the new owner who's running things isn't so great?" Young said. "You'd still be tied to this firm and there is nothing you could do about it."
Organizations including the Alternative Investment Management Association, American Financial Services Association, the Financial Services Institute and the Securities Industry and Financial Markets Association are warning of unintended consequences. Those groups and other trade representatives signed on to a
"Courts, scholars, and economists all have found that noncompetes encourage investment in employees and help to protect intellectual property," the letter states. "In every sector of the economy, employers rely on noncompetes to protect investments in their workforce, to protect trade secrets and other confidential information, and to structure their compensation programs."
The FTC's proposed ban on noncompete clauses does contain one important exception. Company owners with a 25% or greater stake in a business could still be subject to contract provisions preventing them from going to work for rivals. These types of contract clauses tend to be invoked in the wealth management industry after one firm is bought by another and the purchaser is seeking to ensure its newly acquired business doesn't walk out the door with the former owners.
In a
The IAA also argued that FTC's proposal should ban only new noncompete clauses rather than require the unraveling of old ones and that firms should have 18 months to come into compliance. The IAA acknowledged the proposal would not apply to nonsolicitation clauses but argued that exemption should be spelled out more explicitly.
Summit Asset Management's Laughlin said nonsolicitation clauses are really what matters to him. He said he thinks the contract provisions are what allow the firm's three partners and six employees to collaborate and not be especially territorial about their work. All that could be undermined if they were given good reason to worry their book of business could walk out the door with any colleague they introduce a client to. He said noncompetes also help protect small firms like his from predatory recruiting by large rivals.
"Our industry is so competitive and barriers to entry so low, that loosening the relational foundation on which our business is built is a serious threat to our long-term viability," Laughlin wrote in his comments to the FTC. "Rather than enhance competition, it could force smaller businesses like ours to sell to consolidators or risk shutting down completely in the future."
