A recent rule proposal from the Federal Trade Commission banning noncompete agreements has drawn the attention of advisory firms. The proposal will be open for 60 days of public comment, which is likely to include requests from the industry for clarification of just how expansive the proposal could be. As Mark Schoeff Jr. has reported, attorneys familiar with the advisory business believe that the FTC’s view of what constitutes a noncompete agreement is vague and that the proposal itself may exceed the scope of the agency’s authority.
For most businesses looking to retain noncompetes, such as tech firms, the big worry is that trade secrets can walk out the door along with exiting employees. Since the advice business has few trade secrets aside perhaps from those involving technology, the big worry among broker-dealers and registered investment advisory firms is that a departing advisor will poach clients. That, of course, begs the underlying question: Who “owns” the client?
Nonsolicitation agreements, rather than noncompetes, address that issue, but the former are not explicitly covered by the FTC proposal, which is why the proposal’s effect on most InvestmentNews readers remains to be determined.
For years, firms and brokers battled in court whenever a broker moved to another firm and clients followed. In 2004, probably realizing that lawyers were the only real winners in these battles, big firms finally called a truce in the “who-owns-the-client” war by adopting the broker protocol, which allows firm-switching registered representatives to take with them the contact information of their clients, but not other account data.
Firms and advisors each view the client as theirs — or not — when it suits their interests.
Since then, peace largely has prevailed in broker land, which is why the new FTC rule would more likely affect registered investment advisors, especially in the area of firm valuation. Under the FTC’s proposed rule, advisors owning less than 25% of a firm could not be bound by a noncompete agreement, which means that a potential acquirer of a larger firm probably would wind up paying less to reflect the possibility that a significant number of advisors could walk out the door.
Currently, however, nonsolicitation agreements appear to be a greater impediment to advisors leaving a firm than noncompete agreements. Some experts believe the FTC could rule that some nonsolicitation agreements are so broad as to constitute a noncompete, which would mean they could come under the FTC’s supervision.
Whether the FTC proposal is enacted, modified or withdrawn, the question of who “owns” a client is likely to remain. A cynical way to look at it is to note that aside from their client-focused regulatory requirements, firms and advisors each view the client as theirs — or not — when it suits their interests. Perhaps the reality is that neither firms nor advisors truly “own” clients but rather are lessees of clients. Who’s the primary lessee? No one truly knows until an advisor changes firms — and that’s not an efficient business model for an industry based on trust between advisors and their clients.
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