Break Away From The Pack

Noncompetes no longer threaten those planning a breakaway firm

On Behalf of | May 13, 2024 | RIA Formation |

Someone who has achieved a degree of success as a financial advisor or investment professional may dream of running their own breakaway firm. They want to choose what clients they take on and also keep more of the profits when their strategies prove successful. Those subject to strict employer demands often dream of the freedom that comes with starting their own registered investment advisor (RIA) firms.

However, many of the biggest organizations that hire investment professionals require that they sign complex employment contracts when they accept a position. These contracts often specifically include non-compete agreements that could theoretically prevent someone from starting a breakaway RIA firm.

Noncompetes prevent people from working with direct competitors or starting a competing company for a certain amount of time after leaving their position.

Someone bound by a non-compete agreement could face litigation if they attempted to start a business anyway. However, that risk could now be a non-issue thanks to the announcement of a new rule at the federal level.

The FTC has banned non-compete agreements

After a lengthy process involving public feedback and a vote, the Federal Trade Commission (FTC) recently announced a ban on non-compete agreements. That ban could be a boon for those who work as investment professionals and would like to become their own bosses.

Companies can no longer demand that workers sign non-compete agreements as a requirement for accepting a new position. In fact, companies can no longer enforce non-compete agreements even if a worker signed their contract years before the FTC implemented this ban.

Someone who decides to start their own RIA firm no longer has to worry about financial penalties or a court order forbidding them from continuing to operate the business that they just started. Of course, there could be other restrictive covenants, including non-solicitation agreements, that could still lead to litigation and financial penalties for an investment professional intent on starting their own firm.

Tracking key changes to federal employment rules can benefit those hoping to establish their own breakaway RIA firms. As such, investment professionals who have entrepreneurial aspirations may want to review their existing contracts and their business plans with someone familiar with federal and state laws before making any major moves.