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Industry recruiters assessing impact of FTC ban on non-competes

On Behalf of | May 22, 2024 | Financial News

Recruiters in the financial industry are now assessing the effects of the Federal Trade Commission’s ban on most non-compete agreements, reports ThinkAdvisor.

One estimate notes that nearly one in five workers in the financial services industry have signed non-competes, which prevent workers from joining competing businesses or starting their own.

Under the FTC’s new rule, existing non-competes for the vast majority of workers will no longer be enforceable. Existing non-competes for senior executives can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any non-competes against them.

There is some prevailing belief in the financial industry that the phasing out of existing non-compete agreements and the ban on new ones could accelerate recruiting competition and lead to higher numbers of advisors moving to new firms.

However Jason Diamond, a recruiter and M&A consultant at Diamond Consultants, notes that certain sectors do not utilize non-competes, and many of the advisors making such transitions are not bound by such agreements.

“For example, my understanding is that most wirehouse advisors don’t have non-competes in place,” Diamond said. “For 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.”

He added that while there continues to be significant movement in terms of advisor recruiting and acquisition activity this year, the level has dropped 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 said.

Non-solicitation agreements are more commonly used in the securities industry, said Practifi CEO Adrian Johnstone.  He added that non-competes are seen more often among wirehouses who have more employment restraints because they tend to hire advisors at an earlier stage of their careers and are more protective of them

“When you look at advisors in the industry, the largest movement in the industry for advisors is wirehouse to wirehouse,” he said. “So they’re trying to lock everything down as tightly as possible.”

In announcing its ban on non-competes, the FTC said it was attempting to promote competition by protecting the freedom of workers to change jobs, increasing innovation, and fostering new business formation.

Diamond said one sector could see more movement as a result of the FTC’s action is the area of employee-advisor RIAs, where non-compete agreements are more widespread.

“If we get through the court challenges and they rule in favor of the FTC, sure, maybe it does free up some RIA employee advisors to move when they might not have before — but that’s not the biggest channel of advisor movement, anyway,” Diamond explained.

The U.S. Chamber of Commerce has filed a lawsuit attempting to block the FTC’s new rule from taking effect later this summer.

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