This content is from: Wealth Management

Big Winners in Wealth Management if Biden Weakens Noncompete, No-Poaching Agreements

Biden wants employees to have more freedom to seek new jobs. Financial advisors stand to gain.

A new White House administration might make it easier for financial advisors to switch employers. President-elect Joe Biden has signaled in the past that his administration would go after noncompete and no-poach clauses that are ubiquitous in financial advisory contracts. 

“Companies should have to compete for workers just like they compete for customers,” Biden said in 2019. These clauses “suppress wages” and impede the ability of employees to change jobs, he said.

However, indications suggest that the incoming administration won’t take a sledgehammer to these restrictive clauses, instead retaining some “that are necessary to protect a narrowly defined category of trade secrets,” according to a SHRM (Society for Human Resource Management) report.

Most advisory firms use these clauses to keep employees from taking their most valuable asset — clients’ contact information and assets — with them to competitors. Hence, the non-solicitation clause, which prevents them from luring clients elsewhere for a year.

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Wealth management executives told RIA Intel that alterations to these noncompete and other clauses could encourage valued employees to switch jobs.  Alterations, however, could result in contractual changes that limit employee mobility.

If these contractual clauses are weakened by the incoming administration, as expected, financial advisory firms will likely boost pay, encourage equity participation, and do everything in their power to retain staff.  Valued employees, especially those with an enviable roster of clients, will be more marketable and able to more easily switch firms. They also may receive more perks from their current employer to stay.

Several sources contacted by RIA Intel recommend a wait and see approach. Louis Diamond, an EVP with Diamond Consultants, a Morristown, N.J.-based recruiting and consulting firm, specializing in the financial industry, says it’s difficult to predict the effect of potential changes in financial employment contracts because “the devil is in the details.”

Diamond questions if proposed adjustments will apply to “only new agreements or existing ones and what the loopholes are.” 

Noncompete clauses are often nearly unenforceable because their ultimate effect is to prevent an advisor from plying her trade and that often entails legal push-back, he adds.

Diamond says non-solicitation clauses, in which employees are prevented for a year from reaching out to current clients to bring them to a new firm, play a more pivotal role at most wirehouses and RIAs. 

But if these clauses are reduced or limited, it could curtail future M&A activity, predicts Diamond. “If I sold you my firm, and you paid me money for it, I’d sign a noncompete and non-solicitation clause because that’s the only way a buyer can protect his investment.”

Bob Cooper, a partner at King & Spalding, a Washington, D.C.-based law firm specializing in antitrust issues, notes that challenges to these noncompete clauses have existed for years, citing high-profile civil settlements in tech and healthcare.

He notes that employment law varies state to state.  “If there is a conflict between federal and state laws, federal laws control.”  These issues don’t usually involve a conflict of law, but are more concentrated on regulatory enforcement. Some states will be more aligned with the Biden administration and some will contest these clauses.

David Grau Jr., the president and CEO of Succession Resource Group, a Lake Oswego, Or.-based firm that helps individual advisors evaluate the equity in their practices, says changes could pressure advisory firms. If employees can switch firms more easily because of less restrictive employment clauses, “It’ll stifle the industry’s ability to scale their business.” As a result, most owners will be more reluctant to “expose their book of business to additional risk” and be “less interested to train the next generation of professionals. And we already have a succession planning crisis.”

Grau expects that independent financial firms will lose value if these measures are implemented. “It will make businesses less scalable, because of the risk of staff leaving and taking confidential information with them.”

However, Grau sees a potential benefit. More firms will be encouraged “to share equity so your employees never want to leave.”

Advisors who are more experienced with the largest roster of clients will be most in demand, Grau expects. Those in large financial centers like New York City and San Francisco will be most affected since there’ll be ten other shops in proximity vying for them. “But you have less risk of being poached, if you’re based in Wichita, Kansas.”

Diamond expects adjustments will be made to minimize contractual changes and that savvy attorneys will develop new clauses that restrict the ability of employees to jump ship.

A change would greatly affect the RIAs and advisors with the most clients, and the most lucrative ones, Diamond asserts. They would be more in demand without these restrictions.

Grau expects that changes would affect both larger and smaller firms. “Their most valuable asset is the client list of your relationships. If you make it easier for someone to take your most valuable asset away, it will affect everyone, big or small,” he asserts.

If consulting the Biden administration, Grau would advocate for eliminating noncompete clauses so employees could change firms more easily. But he’d maintain the non-solicitation agreements because “firms should have a right to protect their trade secrets.”

Diamond favors changing these clauses. “Advisors being able to move freely is a positive.  Of course, there are bad actors.  But if an advisor is acting in the best interests of their clients, they should be able to freely find better work.” He acknowledges that his outlook could be self-serving since limiting these clauses could lead to more work for recruiting firms like his.

Diamond, however, doubts that a major overhaul would allow advisors to freely take clients elsewhere. Attorneys, he predicts, would draft contracts differently and establish new loopholes.

Although changes to these clauses will likely look dramatic, their “impact will be minimal on the industry, more minor changes around the edges,” Diamond says. Savvy “legal minds will protect the status quo. They’d rewrite these agreements so people would waive these rights.”

Grau expects that if these non-solicitation clauses are modified, a larger number of smaller financial firms will emerge. “We’ve had a lot of consolidation of late, but that could be reversed.  They’ll be a greater number of smaller shops, so firms will return to being what they were years ago,” he predicts.

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