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Non-compete clauses and similar agreements are a bane for many workers, limiting their choices should they decide to leave a current employer. Financial planners and brokers are no different.
Now a proposal from the Federal Trade Commission, the federal consumer watchdog, could eliminate these legal barriers preventing an estimated 30 million workers in industries ranging from sandwich making to medicine to software engineering from seeking employment at rival companies. But for advisors and brokers who are hoping for relief, they may be in for disappointment.
That's because the FTC's proposed ban wouldn't extend to non-solicitation clauses, which bar brokers and advisors from reaching out to former clients after leaving a firm. These provisions are far more common in the planning industry than their non-compete cousins.
Dennis Concilla, a securities lawyer at Columbus, Ohio-based Carlile Patchen & Murphy, said it's probably been 30 to 40 years since he has seen an honest-to-goodness non-compete clause in a financial advisor's contract. Firms, by contrast, regularly pursue former employees for alleged violations of non-solicitation clauses.
Concilla helps to oversee the "broker protocol," a legally binding pact among advisors and brokers that sets rules of the road to prevent lawsuits over alleged non-solicitation violations. The more than 1,800 firms that have joined the protocol have agreed that it's acceptable for departing advisors to take with them client names, addresses, phone numbers, email addresses and account titles. All other documents must stay with the original firm.
Concilla said the protocol has proved very effective at stemming ligation.
"After some very unsuccessful litigation by people who tried to back out of it, it really became almost virtually impossible to breach," he said. "And only in the most egregious situations did it happen that there was a lawsuit."
Brian Hamburger, chief counsel at the New York-based Hamburger Law Firm — which represents wealth management companies — said there is at least one instance when the FTC's proposed rule could make a difference for brokerages and advisors. When one firm buys another in the industry, the employees of the purchased firm will often be subject to compete-clauses meant to keep them from leaving to set up a rival business. The FTC's ban would extend to clauses used for that purpose, Hamburger said, with one notable exception. The proposal would still allow non–compete clauses for people who own 25% or more of a business.
The deets on non-competes
Roughly half of all states already restrict non-compete clauses; California comes closest to an outright ban.
The FTC's proposal would forbid non-compete clauses in new contracts and unravel existing non-compete agreements. It's largely meant to empower workers by eliminating obstacles to seeking better employment.
The clauses, which usually bar working for nearby rival firms for a set number of years, were initially found mostly in the contracts of managers. Now, though, they are frequently used to prevent lower-wage employees from moving on. The FTC estimates one out of every five Americans are subject to the clauses and that banning them would raise employee earnings by $296 billion a year.
In a 2019 report to the FTC , three academics noted that non-compete and non-solicitation clauses are often used in other industries to prevent intellectual property from going out the door when employees leave.
"In contrast, the financial advisory industry is one where the primary goal of (the clauses) is to prevent the loss of clients," the study authors wrote.
And strict non-compete clauses are not entirely unheard of in the financial industry. A recent case involving one made it all the way to a federal appellate court.
In 2016, financial advisor Cara Miller sued her former employer, Honkamp Krueger Financial Services, over concerns that a non-compete clause would prevent her from taking a new job in the industry. Honkamp Krueger responded by requesting an injunction to bar her from working at Mariner Wealth Advisors, where she is now a senior wealth advisor in the firm's Rapid City, South Dakota, office. Hankamp Krueger's injunction request was initially granted in federal court but then overturned on Aug. 24, 2021, by the 8th Circuit Court of Appeals.
Miller's victory was largely due to a technicality. Shortly after quitting Honkamp Krueger, she had sent a letter to the company saying she was also terminating the employment agreement she had signed containing the non-compete clause. The 8th District court ruled her termination letter meant the clause was no longer enforceable. Miller declined to comment for this article.
Non-solicitation and fiduciary duty
For many in the industry, non-solicit clauses are a far greater cause of concern. Financial planner Amir Noor said he was astonished to learn when he changed his job a few years ago that a non-solicit clause would bar him from bringing his clients with him.
Amir said he didn't even change employers. He merely moved in mid-2020 from one branch maintained by Park Avenue Securities, a subsidiary of The Guardian Life Insurance Company of America, to another. Because the managers of each office would get a cut of whatever client fees Noor helped bring in, he was prevented for territorial reasons from trying to bring that business with him.
Noor said he saw little point in trying to fight a clause in a contract he had willingly signed.
"But it put a bad taste in my mouth," he said. "And I said, 'I'm going fee-only' and changed to my current firm."
Park Avenue Securities didn't immediately respond to a request for comment.
Noor, now at the New York-based advisory firm United Financial Planning Group, said he wonders how non-solicitation and non-compete clauses can be justified in light of advisors' fiduciary responsibilities.
Those responsibilities — advisors' obligation to always put clients' interests first — usually require advisors to become intimately familiar with clients' finances. Often, Noor said, he'll end up knowing even more of the financial details of the people who consult him than they know themselves. How then, he asked, could it be in a client's interest if his account had to be handed over to a complete stranger should Noor decide to leave?
"I understand the firm wants to protect their investment," Noor said. "But ultimately, if you are a fiduciary firm, it is not in the client's best interest to have a non solicit. It's in the best interest of the firm."
Yet, despite such complaints, non-solicitation clauses are firmly entrenched in the industry. Max Schatzow, a founder and partner at New York-based RIA Lawyers, said he knows of no significant court challenges to the legal underpinnings of these contract provisions.
When the clauses are invoked, Schatzow said, the first step a former employer will usually take is to seek a restraining order to prevent a recently departed employee from communicating with former clients. Next, he said, comes an initial hearing.
"And whoever wins that will have a lot of power," Schatzow said.
Schatzow said non-solicit clauses come in many different forms, often varying in how long they prohibit advisors from getting in touch with clients. Sometimes they'll have carve-outs that will let advisors keep clients they had before joining a particular firm and only ban contact with newly acquired clients.
Regardless of whether the FTC's proposed ban on non-compete clauses would make a big difference for advisors, it still has a long way to go before becoming law. The FTC is giving the public 60 days to comment on the plan. The rule would then take effect 180 days after being published. But lawsuits from business advocates such as the U.S. Chamber of Commerce will most likely drag the process out even longer.