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Protecting Business Value and Advisor Tenure WITHOUT Non-Competes: A Look at the FTC Ruling
In late April, the Federal Trade Commission voted to finalize their Non-Compete Rule which prohibits the inclusion or enforcement of non-compete clauses in employment agreements in the United States. The rule is currently set to go into effect on September 4, 2024, but is the subject of active litigation which may delay or stop it from going into effect. The FTC’s Non-Compete ban applies to most employer-employee business relationships (with limited exceptions), but how will it affect wealth management and financial services businesses like yours? How will it impact your ability to protect the assets and value of your business if and when team members decide to leave the firm?
How Much Will the Rule Impact Financial Advisory Businesses?
Industry experts from FP Transitions and Key Bridge Compliance sat down this week to discuss the details of the FTC’s rule, the level of concern business owners in the industry should have, and which other means advisory owners can leverage to protect their business and maintain team–and client–retention.
The good news is that our experts expect that the rule should have a minimal impact on businesses in our industry as they have alternative legal and functional safeguards continue to be enforceable which can be leveraged to effectively and appropriately to protect business value.
In fact, in our experience consulting with wealth management firms on entity structure, corporate governance documents, and employment agreements, most advisory owners already decline the use of non-compete clauses. Instead, they opt for more applicable restrictive covenants like non-solicit and non-acceptance clauses. These other restrictive covenants–along with NDAs and confidentiality language–are more specifically focused on the actions that threaten retention of clients, protection of private business details, and preservation of business value than non-compete clauses are.
The following are the best strategies are available to protect your business value, client retention, and team tenure without a non-compete agreement.
Restrictive Covenant Agreements
Non-compete clauses fall into the family of Restrictive Covenants. Non-competes prevent a former employee from taking another job in the industry or starting a new firm. While non-competes will soon be off the table with the FTC Rule, its fellow covenants are just as–if not more–effective at protecting the client base and business value of a financial advisory business. The main one being a Non-solicit Clause, which prohibits an exiting employee or advisor from calling up your clients and asking them to follow them to their new place of business. Additionally, Non-Acceptance Clauses can further prevent the former advisor from taking on clients that they worked with previously as a part of your business, even if they didn’t initiate contact with them.
Employment agreements that include reasonable restrictive covenants are common and savvy in an industry where business value and income is tied so closely to the client relationships. In fact, non-competes that restrict a former employee from working within the industry at all–effectively ending their career–can be viewed as unfair. The use of one can, in and of itself, potentially set a business relationship off on the wrong foot by assuming a contentious exit down the road. Non-solicits and non-acceptance clauses are more reasonable expectations and do not degrade the employment relationship from the start.
These restrictive covenants remain available to you and are a legal means of protecting business value and retention, but there are a few functional strategies that prove effective as well by relying on the idea that the best way to retain your team and clients is to make your business a place that neither would ever want to leave.
Compensation, Equity, and Business Culture
One of the best offensive strategies you have for protecting value and retaining your team in the first place is to create an environment where employees want to stay. Cultivate an atmosphere and culture that makes coming to work enjoyable. Make sure your team feels valued and that they have growth pathways. Create opportunities for key employees to have a say in the business’ future and become invested in its progress.
You can do all of this by ensuring that your compensation packages are competitive with fair–or above market–salary or wage levels, offer clear and generous bonus opportunities, and include comprehensive benefits and time off.
A step beyond–or, rather, into–compensation is equity. Creating equity pathways for your top employees and advisors–either authentically or synthetically–recognizes their contributions to the progress of the business, and provides a long-term incentive for continued service. Equity appreciates along with the value of the business driving those with equity stake to contribute their efforts to the success of the whole rather than only that of the individual.
Finally, examine what you have to offer by way of company culture. You can build an excellent company culture by cultivating a collegial and friendly work environment, providing opportunities for team bonding, offering in-office perks, and by ensuring that you’re hiring people whose personalities and values align with the business you’re running.
Client Experience
Related to team tenure, is client tenure and creating a business they wouldn’t want to leave. For clients you can do this through a focus on client experience. Develop trust by listening to their goals and providing transparency into their financial plan and assets. Make them feel comfortable by ensuring that every person in your firm that they interact with is warm and attentive. Host client appreciation and educational events that help your clients feel valued.
Additionally, a client experience that leverages a team rather than an individual can not only improve client trust and comfort, but provide protection for their service should any one advisor exit. Functionally, for your business, this ties a client to the firm as a whole, making it less likely that they’ll think about following a single person elsewhere.
The bottom line: the best defense is a good offense.
The value of businesses in this industry are heavily tied to client relationships, and the exit of an employee or advisor can cause some anxiety about what else you might lose along with them. There are, however, highly effective safeguards and strategies available to prevent that and protect your business value. Even without a non-compete agreement.
