The FTC's Non-Compete Ban

On April 23, 2024, the FTC issued a new rule banning non-compete agreements in all employment contexts. This rule impacts all for-profit employers, including those in the financial services industry and will come into effect later this year (currently proposed for September). Whether you're an RIA or a broker-dealer, it's time to rethink your strategies to ensure client retention and compliance in this new era.

The FTC's rule, passed by a narrow 3-2 vote, prohibits employers from entering into new non-compete agreements with any employee, including senior executives and independent contractors. This ban extends to all employment contexts, meaning that even unpaid workers and contractors are included. Existing non-compete agreements with senior executives can still be enforced, but all other non-competes must be voided, and employers are required to notify current and former employees about the change using model language provided by the FTC.

This move by the FTC aims to foster a more competitive job market by removing barriers that prevent employees from seeking new opportunities. However, it also means that firms can no longer rely on non-competes to protect their client base and proprietary information.

With the non-compete agreements off the table, your firm needs to find new ways to retain clients and protect its interests. Here are some strategies to consider:

1. Strengthen Your Brand and Client Relationships

In the absence of non-competes, the strength of your brand and the quality of client relationships become paramount. Ensure that your firm's brand is synonymous with excellent service and reliability. Clients should see your firm as more than just the advisors they interact with; they should see it as a trusted institution. This involves consistent branding, superior client service, and a focus on delivering value that is difficult to find elsewhere.

2. Enhance Internal Processes

Develop robust internal processes that ensure a seamless client experience regardless of which advisor they are working with. This might include standardized procedures for onboarding, regular client communications, and proactive financial planning updates. By institutionalizing these processes, you reduce the risk of clients leaving when an advisor departs.

3. Invest in Training and Development

Investing in your advisors' training and development not only improves their skills but also fosters loyalty. Create a culture where advisors feel valued and see opportunities for growth within your firm. This reduces the likelihood of them leaving and taking clients with them.

4. Utilize Legal and Compliance Expertise

With these regulatory changes, it’s crucial to have strong legal and compliance support. Legal experts can help you navigate the new rule, ensuring that your firm remains compliant while finding innovative ways to protect its interests. Compliance professionals can also help in developing strategies for seamless client transitions and maintaining regulatory adherence.

The new FTC rule introduces additional compliance requirements that firms must meet. Employers must notify all affected employees that their non-compete agreements are no longer enforceable. Failing to comply with this notification requirement can result in penalties. Therefore, working closely with your legal and compliance teams to draft and deliver these notifications is essential.

Furthermore, firms must adapt their compliance programs to address the potential risks associated with increased employee mobility. This includes safeguarding sensitive information and ensuring that departing employees do not compromise client confidentiality or firm interests. With the changes set to be in place by September 2024, now is the perfect time to get yourself sorted and stay ahead of the game. 

The FTC's ban on non-compete agreements marks a significant shift in how businesses operate. For RIAs and broker-dealers, it presents both challenges and opportunities. By focusing on building a strong brand, enhancing client relationships, and leveraging legal and compliance expertise, your firm can navigate this change successfully.