Break Away From The Pack

How non-solicitation clauses can impact starting a breakaway RIA

On Behalf of | Jul 13, 2023 | RIA Formation |

Working in the investment or finance sector can be very lucrative and also very challenging. People have to balance technical prowess and market expertise with the curation of their professional relationships. Oftentimes, working as an employee at a finance company or investment firm means accepting only a small percentage of the total revenue that someone generates with smart investments and trades. Those who want to leverage their experience and relationships to maximize their personal income may eventually decide to found their own breakaway registered investment advisor (RIA) firm.

Many employers include certain clauses in their employment contracts that can limit an individual’s options after exiting their current position. A non-solicitation agreement is one of the more common restrictive covenants integrated into employment contracts. Does an existing non-solicitation agreement prevent someone from establishing a breakaway RIA?

The California courts rarely uphold such agreements

Many employers include terms in their contracts that they actually know the California state courts won’t uphold. They may do this because they use one standard contract in every state or because they want those terms to serve as a deterrent. Only those who have legal representation or who learn about California employment laws and court precedent would feel confident moving forward with the new business idea while still subject to a restrictive covenant.

Many workers in California know that non-compete agreements are not enforceable, but they don’t have as much clarity when it comes to non-solicitation agreements. These specialty contract inclusions prevent someone from reaching out to the clients that they knew because of their employment to ask them to move their investments to a new firm. Non-solicitation clauses can also prevent a worker who starts their own company from headhunting their former co-workers to become their employees.

Like non-compete agreements, non-solicitation agreements in California are largely unenforceable. However, the courts have established an important exception to that rule. In a scenario involving the sale of a business, a non-solicitation agreement might hold some legal authority. For the most part, however, an existing non-solicitation agreement is not enforceable in court and would therefore not prevent someone from establishing a breakaway RIA.

Seeking legal guidance to learn more about the legal and contractual challenges that leave people questioning whether a breakaway RIA is a realistic goal or not could help aspiring entrepreneurs to be more informed about their business development plans.