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FTC Proposal Could Ban Non-Compete Clauses. What Does It Mean for Financial Advisors?

SmartAsset: this FTC proposal could ban noncompete clauses

A proposed rule from the Federal Trade Commission (FTC) could ban employers from binding up employees with non-compete clauses. If passed, this rule could increase career opportunities for millions of Americans. And it could change the way employers endeavor to keep their employees in the fold. But what would the rule change mean for financial advisors? We’ll discuss the details.

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FTC Proposes Ban on Non-Compete Clauses

In January, the consumer watchdog FTC released a proposal to ban employers from using non-compete clauses on their employees.

According to the FTC, if passed, the rule could increase wages by $300 billion annually. It could also change the strategies employers implement to keep workers.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina M. Khan said in a statement.

“Non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition,” Khan said.

What Would a Ban on Non-Compete Clauses Mean for Advisors?

SmartAsset: this FTC proposal could ban noncompete clauses

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 proposal doesn’t expand to other types of employment restrictions, specifically non-solicitation clauses.

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 covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer,” 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 firm could be subject to a non-compete, according to the FTC. But for advisors who own less than that – or nothing – they could be 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

FTC Proposal Could Ban Non-Compete Clauses. What Does It Mean for Financial Advisors?

The FTC proposing a ban on non-compete clauses would impact many industries. But it likely wouldn’t impact advisors or brokers that much. This proposed ban doesn’t extend to non-solicitation agreements, which prevent employees from recruiting former clients after they leave a firm.

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