A Federal Trade Commission (FTC) rule will ban employers from binding up employees with non-compete clauses. The ban, which was first proposed in early 2023 and finalized in April 2024, could increase career opportunities for millions of Americans and change the way employers look to keep their employees in the fold, according to the FTC. But what does the rule change mean for financial advisors? We’ll discuss the details.
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FTC Bans Non-Compete Clauses
In January 2023, the consumer watchdog FTC released its proposal to ban employers from using non-compete clauses on their employees. At the time, the FTC estimated that the rule could increase wages by $300 billion annually. It would also change the strategies employers implement to keep workers.
During a 90-day public comment period, the FTC received more than 25,000 comments in support of the proposed ban on non-competes. That led to the FTC finalizing the rule on April 23, 2024. The ban is expected go into effect 120 days after its May 7 publication in the Federal Register.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” FTC Chair Lina M. Khan said in a statement. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
What Does the Ban on Non-Compete Clauses Mean for Advisors?
If you are an advisor or broker who is looking for more freedom, a ban on non-compete clauses may not help much. That’s because the FTC’s rule doesn’t apply to other types of employment restrictions, specifically non-solicitation clauses that advisors and brokers sometimes are subject to.
Non-solicitation clauses ban former employees from trying to poach clients. For companies, those clauses help keep clients in the fold while preventing confidential information from leaking.
This lack of extension to non-solicitation agreements exists because these types of covenants generally “do not by their terms prohibit a worker from or penalize a worker for seeking or accepting other work or starting a business after they leave their job,” according to the FTC.
Professionals in the financial advice industry may find that, because the rule stops short at non-solicitation agreements, not much will change. They may also realize that non-competes aren’t the only way to keep an employee locked in place.
“The firms, they can restrict movement by making it harder for advisors to move their books,” Louis Diamond, president of advisor recruiting firm Diamond Consultants, told Financial Advisor IQ. “We see it at certain firms, like Merrill, for instance, where they’ll offer free (account) fees for a period of time, and they’ve ratcheted up the pressure when advisors leave.”
What About Mergers and Acquisitions?
Some experts have noted that in the word of registered investment advisor (RIA) mergers and acquisitions, a ban on non-competes may have an impact.
A professional who owns more than 25% of the a could be subject to a non-compete, according to the FTC. But for advisors who own less than that – or have no ownership stake – they are free to leave after a sale, taking some of the firm’s inherent value with them. That could change the calculus for acquirers in the future.
Bottom Line
The FTC finalized a rule in April 2024 banning non-compete clauses. While the ban will have a sweeping impact across the economy, it isn’t expect to affect financial advisors or brokers anymore than other professions. The ban doesn’t extend to non-solicitation agreements, which prevent employees from recruiting former clients after they leave a firm.
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