What the FTC's New Non-Compete Ban Means for Advisor Recruiting

What You Need to Know

These agreements are uncommon among wirehouse advisors but do exist in the employee RIA space, recruiter Jason Diamond says.
Non-solicitation pacts are much more common.
The real reason advisors stay put in less-than-ideal conditions has nothing to do with legal agreements, Diamond says.

The publication in late April of a final Federal Trade Commission rule banning most non-compete agreements nationwide sparked debate across a variety of industries where the use of such covenants is common — especially in professional and financial services.

According to one Federal Reserve Bank estimate, nearly one in five workers in the financial services industry report that they have signed a non-compete agreement — far higher than the prevalence reported in industries like construction, education or public administration.

This has led to lots of discussion about the final FTC rule among the wealth management and retirement advisor industries, now seeing high levels of recruiting competition and acquisition activity, and a key thought is that the voiding of many non-compete agreements and the ban on new agreements — even for senior leaders — could supercharge this existing trend and result in even higher levels of advisor movement across firms and channels.

That seems like a reasonable assumption on its face, but in the experience of Jason Diamond, a recruiter and M&A consultant at Diamond Consultants, a lot of the discussion about this potential disruption misses a few key points. Perhaps most important is the fact that many of the advisors and teams who are moving today actually aren’t subject to non-compete agreements.

“For example, my understanding is that most wirehouse advisors don’t have non-competes in place,” Diamond said. “Fro the private bank advisors, it’s more common to have garden leave arrangements in place. A lot of advisors may be subject to non-solicitation agreements, yes, but that’s a very different animal from an outright non-compete.”

The Current State of Play

First asked to assess the state of advisor recruiting and acquisition activity seen so far in 2024, Diamond said there is “still definitely a lot of movement going on,” even if the level of activity has fallen off from the record highs of recent years.

“I can tell you from where I sit that this is still a busy time in recruiting and the M&A market,” Diamond said. “We haven’t seen anything like a big pullback on either front, which some people had expected against a more uncertain market backdrop.

“What’s interesting and cool about the movement today is that it’s coming form all corners of the industry — from the wirehouses to the RIAs to the regional firms. Every corner of the industry has seen both winners and losers,” he explained.

This a good thing for advisors and consumers alike, according to Diamond, as it means advisors are feeling empowered to find a good fit for their evolving practices. It’s also driving firm leaders to be more responsive to their advisors and to reinvest in their services and capabilities in order to protect their business.

A Wait-and-See Moment

On the issue of the FTC’s final rule, Diamond said he is still in a “wait-and-see mode,” as the rule is almost certain to face legal challenges, and its long-term future and enforcement could be affected by future political or policy changes. Still, he doesn’t expect a dramatic turn of events once the FTC rule takes effect later this summer.

“Again, when it comes to the big wirehouse teams that get a lot of attention when they move, the fact is that non-solicitation agreements are much more common,” Diamond said. “Almost every contract has one of these built in.”

Diamond said his anecdotal experience is that non-compete agreements do seem to be more common in the employee-advisor RIA space, suggesting this pocket of the industry could theoretically see accelerated movement.

Non-Competes vs. Non-Solicitation Agreements

“As your readers probably know, a traditional non-compete agreement is going to be highly restrictive,” Diamond said. “It basically means you can’t take employment at any competitor during the time it is effective.

“A non-solicitation agreement is a lot different. What it basically says is that, you can go take the job at XYZ Competitor, but you cannot directly solicit your old clients. Frankly, there are a lot of workarounds,” he explained.

For example, Diamond noted, the “big announcement” approach is very common.

“Historically, a big advisor who is moving shop might take out a tombstone ad in the paper. These days, it’s probably more of a phone call or an announcement online, where you are just stating simply that you have moved firms. The hope is that clients will learn this and naturally want to move, and they’ll reach out to you directly, and that’s fine,” he said.

The exact approach any given advisor takes to transferring their old book of business is a matter of risk tolerance.

“Our counsel to our clients is that they should always follow the letter of the law, but there are definitely some shades of grey here,” Diamond said. “Most of the time there isn’t going to be a problem. Nine out of 10 transitions go perfectly smoothly. You only hear about these things when they go south. Maybe an advisor was a little too aggressive and their prior firm caught wind of it.”

The Real Reason Advisors Stay in Unhappy Homes

Diamond said the focus on non-compete and non-solicitation agreements misses a bigger and more important point about when, why and how advisors move shop.

“Are there some people out there in the industry right now who are unhappy but are aren’t moving because they fear a non-compete?” Diamond asked. “Sure, there probably are some people in that situation in the RIA space.

“But honestly I think the far bigger deterrent is simply the hassle factor,” he added. “The biggest thing you are grappling with is the work of moving, especially in a market where things are booming for advisors and things feel ‘good enough’ for most people. To upset the apple cart requires a willingness to stir the pot.”