Non-compete agreements (where a company prohibits an employee from working for competitors, at least for a certain period of time) are often used to help companies protect their investment in the employee (e.g., the time and money spent training the employee) as well as preventing the employee from taking the company’s best practices to a new job at a competitor. But in the financial advisory business, firms are typically less concerned about employees taking intellectual property (e.g., financial planning processes and other ‘trade secrets’) with them to a competitor and are more concerned about clients (and the revenue they bring in) following their (departing) advisor to their new firm. Because of this, non-solicit agreements (where the departing advisor is restricted in whether and how they can communicate with their clients, and “solicit” them to come with the advisor when they leave for another firm) are much more common in the financial advisory industry.
As non-solicit agreements have become more prevalent among independent advisory firms, the terms of these agreements come into focus, such as whether a non-solicit agreement covers all of an employee advisor’s clients or only certain ones. For instance, while it might be clear that the firm ‘owns’ the relationship with a client that the firm brought on itself and passed on to the advisor (thereby perhaps warranting a stricter non-solicit agreement), it would seem inappropriate to restrict an advisor from soliciting certain other clients (e.g., a personal friend or relative/family member) to their new firm.
In addition, there is also a fuzzy middle where it is less clear who owns the goodwill equity of the relationship (e.g., if a firm brings in a prospect through its marketing, but the advisor closes the deal and brings the individual on as a client, or the advisor brings in the prospect but does so using some of the firm’s marketing resources or by leveraging its known brand in the local community). In these cases where the client is effectively a ‘joint’ client of both the firm and the advisor, it might be appropriate for the firm and the advisor to negotiate the specifics of how these client relationships will be handled under the firm’s non-solicit agreement. For instance, the firm and the advisor might specify the client relationships that would be acceptable for the advisor to solicit, or perhaps negotiate a price at which the advisor would have to pay to take and service clients at their new firm.
Since many advisors and firms lack the legal expertise or resources to hire a lawyer to craft a custom agreement for each advisor, we are introducing the Advisor/Client Relationship Equitable Split (ACRES) Agreement to the advisor community as a foundational template advisory firms can use and/or modify to their specifications. At its core, the ACRES Agreement formalizes the recognition of the “yours, mine, and ours” split of client relationships, and allows firms and advisors to set the terms for how those different types of client relationships will be handled in the event that there is ever a split (from which clients can be solicited or not, what client information can be taken or not, and whether compensatory payments are due back to the firm or not).
Ultimately, the key point is that non-solicit agreements that represent the investment that firms and their advisors make into attracting and serving clients can leave each side feeling confident that their interests will be respected if the advisor and firm ever decide to separate in the future. Our hope is that by providing the ACRES Agreement as a template, advisory firms and their advisors can set better, clearer, and fairer terms for both parties!