David R. Evanson

The Career Advisor, Winter, 2005

That is indeed the question, especially if you are a principal in financial planning practice, and are waking up a night wondering if your senior associates may set up shop one day and take half of your business with them. As the old saw goes . . . in financial services, the assets ride up and down the elevator everyday.

Therefore, do you need to protect yourself by having them sign non compete and non solicitation agreements?

The answer is that you need to protect yourself, but these familiar tools may not be the best way to get the job done, according to Brian Hamburger, a practicing attorney, founder of Market Counsel, a compliance consulting firm, and a new company called Breakaway Broker, which helps brokers establish their own financial planning practice.

It’s worth noting that non compete agreements are complex. And even when they are written by experts, different jurisdictions interpret them differently and as a result, the protection they offer may ultimately be outside of your control.

But, according to Hamburger, there are three reasons con compete agreements don’t work in a financial planning setting. First, he says, if you are going to the trouble (see below) of getting non compete agreements, you want to make sure they’re enforceable. “You definitely don’t want to use boilerplate non compete agreements.” Translation: they may require significant time on your part and may be expensive as well.

Second, you may stir up a lot of resentment by presenting a valued, trusted and senior employee with a non compete agreement. “What they may think you are saying,” says Hamburger, “is that you do not trust them, and they are not part of the family.”

Third, he says, there may be tax implications issuing from your non compete or non solicitation agreements. “If your senior associates are independent contractors, the existence of non compete or non solicitation agreements could make their status as independent contractors untenable, if it was ever challenged.”

Hamburger says that rather than non compete and non solicitation agreements, financial planners are turning to confidentiality agreements, because, “They are winning they day in court.” In essence, this type of agreement takes all the intellectual property of the firm – clients lists, business processes, promotional strategies, prospects lists – and makes it confidential, thus eliminating its use outside of the firm by former employees.

Hamburger says that confidentiality agreements are much less expensive than non compete agreements. In addition, he says that unlike non competes, which are created for only a select few employees, confidentiality agreements can be given to each employee to sign. “This is a significant advantage, not just for the protection it affords,” says Hamburger, “but also because integrating a confidentiality agreement into the standard operating procedure for all new employees, as well as independent contractors, is much less disruptive, and is less likely to provoke issues with any particular employee.”

According to David Grau of Portland, Oregon, based FP Transitions which helps planners buy and sell practices, confidentiality agreements and non solicitation agreements remain de rigueur in the sale of a financial planning practice. “The buyer wants to protect their investment and in the sale of a practice, non competes are easier to get and easier to enforce.”

Grau suggests that outside of a sale, the use non compete agreements may be counter productive within the realm of financial planning. “If you think that having a client subpoenaed and subjected to a tough cross examination is going to get them to come back and then share their most intimate financial details with you, you may be disappointed in the outcome, and ultimately in the protection your so called non compete agreement gave you.”