Is Your Non-Compete Binding? Helpful Tips for Transitioning Advisors

So, it’s advised you first look for these clauses in your agreement before taking any action with your clients. If you do find them, and they sound highly restrictive, it may not be as bad as you think. Some states—like California, Oklahoma and Montana—have laws that effectively void contracts restraining you from engaging in a lawful profession, trade, or business. Other states may not void them completely, but they do make enforcing them difficult. 

Understanding which laws and nuances affect your situation may provide you with leverage when it comes to taking action. The best way to determine where on the spectrum of “highly restrictive but non-enforceable,” to “slightly restrictive and likely enforceable” that you fall, is to consult a local attorney.

Second, read up on the Protocol for Broker Recruiting (“the protocol”) and the rights and protections it offers. The protocol was created to protect clients’ privacy and freedom of choice, above all else. By extension, the RRs serving those clients are protected as well – even if they switch or start their own firm.

Understanding the Broker Protocol 

The XYPN Compliance Team detailed the protocol, its background, and how to comply with it in a recent blog, Leaving Your Firm? The Broker Protocol is One Detail You Can't Miss. In short, fully complying with the protocol allows the Registered Representative (RR) to leave with: client names, physical addresses, email addresses, phone numbers, and formal client account names, but NOT account numbers. Failure to comply with the protocol allows the registered Broker-Dealer or RIA to deny the departing RR these affordances. Violation of the protocol can result in a lawsuit.  

Understanding the protocol and whether your current firm is a registered member (the directory can be found here) as well as how any of the three types of non-competes may impact you will help to inform your conversations and decisions as you move toward your goals.

Three Types of Non-competes

Comprehensive Non-Compete:

This kind of non-compete is meant to be all-inclusive. The rationale is that if RRs leave the Broker-Dealer firm, they are prevented from acting as a financial advisor, or performing any such service for any advisory firms that act in competition with the original Broker-Dealer. On closer inspection, it becomes clear that all firms are essentially in competition with one another, making the comprehensive non-compete prohibitive of using your professional training. The interruption of an advisor's livelihood makes comprehensive non-competes hard to enforce. 

Non-Accept:

This kind of non-compete provides the advisors with a specific list of clients for whom they are, and are not, allowed to provide advice. This is almost always regardless of how you’ve sourced these clients. Even if you haven’t directly solicited their business, by contacting the clients directly, or indirectly, the non-exempt agreement bars a RR from accepting the clients' business.

Non-Solicit: 

This kind of agreement allows RRs to gain the benefits of complying with the protocol, so long as they do not directly solicit the clients of their original Broker-Dealer or RIA firm. The protocol may include clauses that departing advisors are not permitted to contact their clients for a specific period of time, or they may be barred entirely from soliciting clients of the firm. However, the benefit of a non-solicit clause is that an advisor may be permitted to access the client's business if the client found them organically, say through an internet search or door-to-door mail announcing their new firm that happens to reach clients they are not allowed to notify by direct means.  

There have been examples where advisors have been able to skirt the edges of their non-solicit agreements. One such example is in non-direct targeting. A RR left their Broker-Dealer, complying with the broker-dealer protocol. Once at their new RIA, the RR created a broad, non-discriminatory, and geographically targeted mail campaign to gain the attention of new potential clients. Even though his broker-dealer, and respective clients, were included within the zip code targeted, the RR was still within compliance of his non-compete as they did not solicit clients of the former Broker-Dealer specifically. 

The same occurrence happened when an RR took out a billboard ad on the side of a busy road to garner new clients. The billboard attracted the attention of tens of thousands of passers-by, as well as the attention of their firmer broker-dealer and respective clients, but because it was a geographically-based marketing activity, the RR was still in compliance with their agreement. 

The key to navigating your client relationships as you transition away from your B-D or RIA is to arm yourself with information, consult a local attorney, and consider thinking outside of the box should you find yourself restricted from doing business with those you care about.