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!
Michael's Note: We are cognizant in writing this article that the subject of non-competes, non-solicits, non-service, and similar agreements is highly controversial amongst advisors and their firms these days. Advisors want to protect their investments into their careers, their client relationships, and their ability to earn a living. Advisory firms want to protect their investments into their advisors, their marketing, their systems, and their ability to generate a profit and maintain their enterprise value. At times, both parties seem to lose the perspective of the other: advisors need to realize that if firms can't protect their revenue and enterprise value, they simply won't offer training and a platform for advisors to use; firms need to realize that forcing advisors to commit their career to a single firm for life isn't realistic as advisor preferences, client preferences, and the firm's own ownership may change many times over the decades to come.
Ultimately, the theme of this article is that in situations of 'regular' employment (as distinct from equity transactions such as becoming a partner/equity owner or engaging in a merger or acquisition), we do not believe that non-competes are appropriate tools and are unduly limiting of an advisor's ability to simply earn a living in a profession that requires substantial multi-year investments of time into knowledge, skills development, and reputation/relationship development, and are just aggravating the profession's ongoing advisor talent shortage.
Instead, we believe that non-solicit agreements, and terms regarding either non-service (or payments from the advisor to the firm for 'taking' and servicing clients after leaving) are a better approach. However, different firms engage their advisors in very different capacities – some firms bring in clients and 'give' them to their advisors, while others leave it to the advisors to get all of their own clients. So there is no 'one-size-fits-all' way to structure non-solicit provisions and separation compensation payments for servicing former clients in a manner that is fair, because it will vary by context. Some firms will insist that all clients are their clients, others will attract advisors by insisting that all clients are the advisor's clients, and some will simply ask that if the advisor and firm part ways that they take a "do-no-harm" approach where each party leaves with the client relationships they came to the table with in the first place.
As a result, our hope in publishing this article, and the associated new "ACRES Agreement" template, is to at least provide a better starting framework for advisors and their firms to set their own terms of what happens to clients in the event of separation – albeit built on a chassis of non-solicit and separation compensation payments, not via a non-compete approach. Legal counsel is of course always encouraged, but recognizing that one or both parties often cannot afford a lawyer for each and every employment agreement, we hope that the ACRES Agreement expedites the process.
However, the ACRES Agreement is still not intended for use in the event of 'making partner' (i.e., becoming an equity shareholder) or where a merger/transaction is occurring; in such cases, there is enough at stake financially that advisors can and should engage directly with independent legal counsel to represent them regarding the unique circumstances of each equity transaction.
Non-compete and non-solicit agreements are common around the business world. The former are often used to dissuade companies from 'poaching' another's employees, and/or to prevent employees (at least for a certain time period) from taking the knowledge gained from working at one company to a competitor; while the latter are typically used to protect companies from losing clients when an employee who serves those clients leaves for another firm (or starts their own).
But these agreements (particularly non-competes) have come under scrutiny in recent years for how they can restrict an employee's ability to simply earn a living, especially when it pertains to a chosen profession that may have taken years of education and experience just to get going. Not to mention potentially limiting a client's ability to simply choose who they want to work with (regardless of what firm that professional chooses to work for).
Amidst this backdrop, the financial advice industry, in particular, has grappled with the use of non-competes and, more commonly, non-solicits during the past few decades. And ironically, while their use in the wirehouse space has died down in recent years (thanks in large part to the Broker Protocol, under which participating broker-dealers agree that departing brokers can take certain client information when they leave for another firm), as firms in the independent broker-dealer and RIA channels have grown from small practices to larger businesses (with many advisors under the same roof), the use of non-solicit agreements has ironically increasingly come to the forefront in what historically was an 'independent' channel that bristled against them.
Yet the reality is that as the advisory industry more frequently shifts to recurring revenue models where a significant portion of enterprise value is the 'goodwill' of the client's relationship to the firm (and its advisors), and more firms are centralizing their marketing and 'giving' firm-developed clients to their advisors to service, the stakes are increasingly high for many advisory firms to protect their own business and the business development investments that are being made. Even as for some other firms, the reality is that most of the work in getting new clients really is still done by the advisor, and the firm itself really has little or no attachment to the client relationship. And, of course, some are in a messy middle in between.
Which means that ultimately, there is a balancing act between crafting a non-solicit agreement that is fair to both the firm and the advisor (both when it is clear that one side or the other did most of the work of attracting and servicing the client, and when it is more ambiguous). This can be a challenging situation requiring careful negotiation from both sides. Especially when few advisory firms (and even fewer individual advisors) retain formal legal counsel to draft such an agreement, with each side required to independently review increasingly restrictive versions of the employment agreement.
So how can advisory firms efficiently and appropriately (and legally) formulate an agreement that is really 'fair' to all parties?
The History Of (Restrictive) Employment Agreements For Financial Advisors
Employment agreements with restrictive covenants like a non-compete provision (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 prevent 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 or 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.
The Path To The Broker Protocol
In the 1980s and 1990s, financial advisors predominantly worked for regional broker-dealer or national wirehouse firms as employees of the company (rather than as independent contractors of broker-dealers or under their own independent RIA). Under this dynamic, the brokerages would invest heavily into training to help brokers get started and learn the business, and then invest further into their national brands to help those advisors attract clients to the firm. In return, advisors were typically subject to non-solicit or other restrictive agreements, so that if they were lured away by a competing brokerage after having leveraged the original firm's training and branding to get clients, they could not solicit away or service those clients for a certain period of time.
Nonetheless, because it's so expensive to market and attract new clients, many firms still found it more cost-efficient to try to recruit away advisors from competing brokerage platforms, and hope their clients followed, despite the legal entanglements. In fact, it was common for brokers to announce their departure in the final minutes of a Friday afternoon (after most of the other brokers in the branch had left for the day), and then spend the weekend racing to contact and convert as many clients as possible to their new firm (before everyone else came back to the office on Monday morning and started making phone calls to retain them). Which, in turn, led lawyers from the prior broker-dealer to try to intervene to give the firm time to retain… which, in the extreme, meant trying to find a weekend judge with whom they could file for a Temporary Restraining Order (TRO) against the departing broker to stop them from soliciting clients during the weekend transition (following the subsequent Monday by a more substantive injunction to further inhibit the broker from transitioning to a new firm).
In 2003, the matter was further complicated by the SEC's implementation of Regulation S-P, which places substantial obligations on financial services firms (including broker-dealers) to protect the privacy of client information. In the context of broker-dealers switching firms, this greatly amplified the stakes, because a broker who changed firms and took client information along was not only potentially breaching an employment contract with the prior broker-dealer by soliciting away clients, but (by virtue of taking client information) was also causing a privacy breach under Reg S-P (which introduced the potential of FINRA sanctions against all involved parties).
And the irony amidst it all was that the bulk of such recruiting and advisor switches happened amongst a relatively small number of major wirehouses… who might end up suing each other simultaneously (as firm A sued firm B for recruiting one of A's advisors, even as B sued A for recruiting one of B's advisors the same week!). Such that with the growing volume of litigation against departing brokers in both directions, combined with the higher stakes when Reg S-P was implemented, the major wirehouses (Smith Barney [now Morgan Stanley], Merrill Lynch, and UBS) established the Broker Protocol in 2004 to provide a clear process for how a registered representative could change to another firm, without being deemed in violation of any firm's non-solicitation clause in their employment agreement, and in a manner that would not violate Reg S-P.
In essence, the major firms decided that it was better to make it easier for their brokers to leave in exchange for the potential that those firms could also increase the number of brokers they recruited in, while reducing the collective number of reciprocal lawsuits that all the firms were filing against one another. And the Broker Protocol has expanded significantly since that time, now counting more than 2,000 active members.
Yet ironically, while the Broker Protocol was conceived as a way for the major wirehouses to avoid costly litigation when brokers moved amongst member firms, it also opened the door for employee brokers to leave the wirehouse channel altogether, particularly as options for independence – including the independent broker-dealer model (where the broker-dealer provides a platform, but the advisor 'owns' the client relationship) and independent RIA model (where the advisor-owner has 'total' independence) – have become increasingly popular in the past 20 years. Such that some of the early/original members of the Broker Protocol (like Morgan Stanley) have opted to leave (as they felt they were now losing more advisors to the independent channel than they stood to gain by recruiting away from other Protocol firms!).
The Rise Of The Independent Model And The (Re-Emerging) Use Of Non-Solicits
Unlike advisors working under a larger broker-dealer, 'breakaway brokers' and others starting their own RIAs as solo practices have not needed to worry about non-solicit agreements, as for many years, the whole point of 'going independent' was that the advisor actually owned their own firm altogether and therefore 'owned' the client relationship themselves.
But in recent years, the increasing popularity of the Assets Under Management (AUM) and subscription models has led some advisors to scale their business by attracting clients who bring in steadier recurring revenue through these fee models (compared to the lumpier series of one-time revenue events for commission-based advisors) and then handing these clients off to service advisors (who are employees of the firm). Which is fundamentally different than the 'eat-what-you-kill' wirehouse model of old, as now a growing number of advisors are, for the first time, being 'given' clients that they didn't generate but are expected to service to sustain ongoing revenue… on behalf of the firm as 'the firm's client'.
However, given that the firm owner is not the main point of contact for these clients – clients still are serviced by, and form a primary relationship with, their individual advisor – this scenario raises the potential for clients (that the firm generated) following their employee advisor if that advisor were to leave for (or be recruited away by) another firm or start their own practice.
In light of this, the growth in the number of independent firms with multiple employee advisors appears to have led to a resurgence in non-compete and non-solicit agreements (according to an informal poll, 42% of advisors reported working at firms where they were required to sign a non-compete agreement and another 28% had to sign non-solicits, while only 24% said their firm used neither type of restriction in their employment agreements!).
Which means that the industry appears to be entering a stage where independent firms have created stronger, more centralized recurring revenue models… and consequently are re-creating an even more stringent non-compete/non-solicit regime than brokerage firm employees faced prior to the Broker Protocol! And raises the question of whether the pendulum may be swinging too far toward restrictive employment agreements?
How Firms And Advisors Can Determine Who 'Owns' Client Relationships: Yours, Mine, And Ours
As non-compete and non-solicit agreements have become more prevalent among independent advisory firms, the terms of these agreements have 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 clearer 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 that the advisor themselves brought (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 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 the firm's known brand in the local community to the advisor's business development benefit).
Given the variety of potential scenarios for attracting and servicing clients, non-solicit agreements that clearly delineate who 'owns' the client relationship can set expectations for both sides, and potentially prevent conflict if the advisor eventually departs the firm.
While this article discusses whether the firm or the advisor 'owns' the client relationship, it is important to acknowledge that clients have their own preferences and should be able to work with a firm and advisor of their choosing. That being said, given the material economic value clients bring to advisory businesses – where the overwhelming majority of an advisory firm's valuation is literally its 'goodwill' value of client relationships, it makes sense for firms and their advisors to try to set terms of the relationship among the client, their advisor, and the firm.
The Decline Of Non-Competes And The Rise Of Non-Solicits For Independent Advisory Firms
Of the two types of agreements, non-competes arguably have a far more negative impact on the affected employee than do non-solicits, as a strict non-compete could prevent an advisor from engaging in the business they have trained for and worked in for many years (and could have a damaging effect on the advisor's income, even if the non-compete is 'only' for 12 months, as they might not be able to find a suitable position during the interim period that would not violate the agreement).
With this in mind, several states have banned non-compete agreements or at least have restricted them to only certain positions (e.g., limiting them to highly paid workers). And in early 2023, the Federal Trade Commission (FTC) proposed a rule that would ban non-compete agreements nationwide. One exception to this is for a person who owns 25% or more of an acquired business, which is potentially applicable in the advisory industry given the number of advisory firm owners who sell their businesses, as acquiring firms will want to prevent sellers (who, unlike with employees bound by non-compete agreements, are being compensated for entering the agreement through the sale price of their firm) from starting a new firm and bringing over their former clients, who are often the main 'prize' of an acquisition.
Notably, the proposed FTC rule would apply not only to new employee agreements, but also to agreements with current and former employees (which would no longer be valid). Which indicates, even as many financial advisory firms continue to have employees sign non-compete agreements, that many government officials have taken note of how non-competes can 'unfairly' (to the point that the government may intervene) hinder an employee's fair opportunity to earn a living in their chosen career.
At the same time, given the significant amount of time and money that firms put into marketing to attract new clients (e.g., the 2022 Kitces Research study on Advisor Marketing found that, in 2021, the client acquisition cost practice-wide for financial advisors was $2,167 per client, and upwards of $4,000 per client for established advisory firms, with a cost of more than $7,000 per client for multi-million-dollar practices), it is understandable that they would want to have some way to 'protect' their business development investment, particularly when these new clients are 'handed off' to be served by employee advisors.
And compared to the more draconian non-compete agreements (which can prohibit an employee from working at a competitor advisory firm, even if they do not solicit their previous clients), non-solicit agreements can offer a more tailored approach to prevent departing advisors from inviting (certain specified) clients to follow them to their new firm, at least for a certain period of time (e.g., 1 year, perhaps 2 at the max) to allow a sufficient amount of time for the firm to convince the departed advisor's clients to stay before the advisor is allowed to give their (new) pitch.
Delineating "Advisor" Clients Vs. "Firm" Clients In Non-Solicit Agreements
At the extreme, a firm could use a non-solicit agreement to prohibit departing advisors from reaching out to any of the clients they worked with at the firm, given that the firm spent money to support the advisor in developing their relationship with the client (e.g., through marketing dollars to bring the client to the firm, or money spent on the tech stack and support staff the advisor leveraged to serve the client). But such a severe restriction arguably is not appropriate in some cases; for example, it would be a bit extreme for a firm to prohibit an advisor from inviting a client who is a family member or a close personal friend (from long before they became an advisor) to follow them to their new firm.
With this in mind, categorizing certain client relationships as 'belonging' either to the firm (in which case the advisor would be prohibited from contacting the client during the non-solicit period) or to the advisor (in which case the advisor would be free to conduct outreach after their departure) can help clarify the status of client relationships for both the firm and the advisor well before the advisor decides to leave the firm.
So-called 'firm clients' could be, for example, those who initially came to the firm as a result of the firm's marketing, were 'closed' by the firm (e.g., by one of its principals), and were then 'handed off' to be served by the advisor. Given the level of investment the firm made to obtain these clients, it would be reasonable for the firm to have the opportunity to hold onto them unsolicited for at least a certain period of time if the service advisor left the firm. Covering 'firm clients' under a non-solicit agreement could also deter other firms from 'poaching' advisors (because while the other firms might want to gain the talent of the advisor, they also typically would want the advisor to bring along a good chunk of their client base and their associated revenue, which a reasonable non-solicit of the firm's clients would prevent).
On the other end of the spectrum, 'advisor clients' could be those who the advisor brought to the firm on their own, for example, as a result of a previous personal relationship (e.g., family members and friends). In these cases, it would seem to be harsh for the firm to restrict the advisor from letting these clients know about their new position and soliciting them to come along, and therefore could be waived from the requirements of the firm's non-solicit agreement (though advisors currently subject to non-solicit agreements might be surprised to find out that many of their personal contacts are subject to strict rules about solicitation if the advisor were to leave their current firm!).
The Fuzzy Middle: Dividing Up 'Joint' Clients
When reviewing an advisor's client roster (or, more proactively, setting standards when they are initially hired), some client types will clearly fall into either the 'firm client' or 'advisor client' camps. However, certain (and for some firms, most or nearly all) client relationships will likely fall into the 'fuzzy middle' where it is less clear whether, and how, the relationship should be subject to the non-solicit agreement and who the client 'belongs' to.
For example, a prospective client might approach the firm as a result of its marketing spend, but the advisor is the one to take the lead on the sales process to close the prospect and have them come on board as a client. In this case, because both the firm and the advisor played a role in having the client join the firm, it might be less clear who 'owns' the relationship compared to more clear-cut scenarios.
A similar situation could occur if an advisor not only finds the prospect but also brings them on board using the firm's branding/marketing resources in the processes. While the advisor in this scenario put in more 'work' than in the previous scenario, a firm might still be resistant to giving full ownership of the client relationship to them, as it's still not clear if the advisor would have gotten the client entirely on their own without the firm's brand and resource support.
Another scenario where a client relationship might be considered 'joint' is where an advisor serves as the lead for a client in a team environment, yet while the lead advisor may have initially introduced the client to the firm, the client relationship is ongoing because of the firm's broader team and other staff support (e.g., has a service advisor on the team managing the ongoing relationship after the lead advisor initiated it).
Finally, even in cases where the advisor brings the client in and serves as their lead advisor, they may still be benefitting from the firm's platform (e.g., office space, tech stack, and compliance oversight) and team support (e.g., a client service administrator and paraplanner), which might make the firm reluctant to allow the advisor to solicit the client openly if the advisor leaves for another firm.
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 specifically how these client relationships will be handled under the firm's non-solicit agreement.
One option would be to specify which client relationships would be acceptable for the advisor to solicit and which would be unacceptable. Another option would be to prohibit advisors from soliciting these 'joint' clients for a certain period under the agreement but, in return, to give them a higher salary as compensation for this concession. Other firms might distinguish themselves in the hiring process specifically by granting advisors the freedom to solicit and continue to work with 'joint clients' (and then simply try to provide a good enough firm environment that the advisor would never want to leave anyway).
Alternatively, some firms and their advisors might choose to negotiate a price the advisor would have to pay to 'take' clients with them to their new firm – effectively compensating the firm for its contributions while also allowing the advisor (and the clients themselves) to still choose who they want to work with.
For instance, in cases where the advisor did most of the work bringing on and servicing the client, the firm could permit the advisor to pay a 'below-market-value rate' (e.g., 1.5X trailing 12-month client revenue, assuming an approximate market rate of 2X–2.5X) for the client relationship in recognition of the advisor's sweat equity, while still providing some financial recovery for the resources that the firm committed. On the other hand, in cases where the firm did most of the work, the advisor could perhaps be required to pay a greater-than-market value (e.g., 3X trailing 12-month client revenue), because the firm does not want to 'sell' the client and thus expects a premium for giving the advisor an "option for forced purchase" pursuant to their non-solicit agreement.
Different firms and advisors can decide whether and where to set such a valuation threshold, but the essence is that rather than either fully barring advisors from taking clients or providing them an open pathway to do so, an exchange of value – the advisor's ability to bring clients and revenue to their new firm, for which the firm receives a separate compensation payment for its role – provides another way to create equitable value for both the firm and its advisors where it's not a clear-cut matter of whether the client 'belongs' to the advisor or the firm.
Introducing The ACRES Agreement Template For Advisor Employment Agreements
Ideally, the breakdown of different client relationship types – firm clients, advisor clients, and joint clients – and the advisor's ability to contact them upon their departure from the firm (or not), along with any required compensation (or not), is commemorated in an agreement that is mutually agreed upon between the firm and the advisor. Which ultimately helps set expectations in advance and prevents (or at least reduces) acrimony in the event of a split where the advisor leaves for another firm or starts their own practice. And some firms may even be able to use a clear employment agreement with 'reasonable' non-solicit provisions as a tool or feature to attract talent with terms that convey a 'fair' balance between the interests of the advisor and the firm (and the freedom of clients to work with whomever they choose)
But since most advisors and firms are not legal experts and might not have the time or budget to hire a lawyer to craft a custom agreement for each advisor (or to manage the escalating legal costs of lawyers negotiating back and forth to draft and adapt a custom agreement built from scratch), Kitces.com teamed up with Chris Stanley, the Founding Principal of law firm and compliance consultancy Beach Street Legal, to create the Advisor/Client Relationship Equitable Split (ACRES) Agreement 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 would be handled in the event that there is ever a split (i.e., which ones can go with the advisor, which stay with the firm, which can or cannot be solicited, and whether there are any buyout provisions attached).
Built in the spirit of the Simple Agreement for Future Equity (SAFE) Note developed by Y Combinator that similarly helped to formalize agreements with fairer terms between startup founders and their investors (while also bringing down legal costs to be able to work from a known and standardized template), the ACRES Agreement provides a more templated process for firms and their advisors to work together to set the terms for each client category (and then categorize the client relationships) on their own (potentially avoiding the need to work with an attorney at all), or use it as a starting point to begin the conversation and then engage a law firm that has experience with advisor employment agreements (e.g., Beach Street Legal) to adapt it to the firm's individual circumstances in a more expedited manner.
Notably, given that advisors affiliated with broker-dealers have their own legal dynamics as registered representatives under Financial INdustry Regulatory Authority (FINRA) rules, the ACRES Agreement template is intended primarily for RIAs. It is also designed to be used in the employment context (between the firm and a newly hired or current advisor employee) rather than as part of an equity agreement when an advisor becomes a partner/equity-owner or as part of a merger or acquisition (as equity partnership or purchase agreements, and their associated restrictive covenants, could be very different, and are recognized very differently by courts, when there is an exchange of remuneration for equity involved).
Key Provisions To Consider When Using The ACRES Agreement
The ACRES Agreement recognizes that client relationships can fall into the three 'tiers' of Client Categories discussed above – "Firm Clients", "Individual Advisor Clients", and "Joint Clients" – and includes a range of potential scenarios for the firm and advisor to work through (e.g., clients introduced by the firm and serviced solely by the individual advisor, versus clients that came to the firm and are served by that advisors, versus clients that were introduced by the advisor but handed off to another advisor or team to service, etc.) to determine which Client Category they fall into based on the firm's interpretation of that scenario. As well as space for firms and advisors to designate custom scenarios specific to the circumstances of the firm.
After determining how client relationship types fall into the 3 Client Categories, firms and advisors can then discuss the solicitation rules for each. While the disposition of "Firm Clients" and "Individual Advisor Clients" is likely to be easier to agree to (with the firm commonly maintaining more control over the former relationships, and the advisor having more leeway with the latter, though obviously, exceptions may apply), determining the treatment of "Joint Clients" will almost certainly be trickier. For these scenarios, the ACRES Agreement allows firms and advisors to set whether Joint Clients remain with the firm or if they can be solicited by the advisor, or alternatively allows the parties to set a formulaic buyout provision where the advisor can solicit the clients but with an obligation to pay for the revenue they ultimately service (for which the valuation multiple can also be negotiated in advance), so everyone is clear what would happen to these client relationships if the advisor were to depart.
The ACRES Agreement also allows firms and advisors to delineate exactly what client information (e.g., name, phone number, email address(es), and/or account names) the advisor is allowed to take with them upon departure, in a manner that is compliant with privacy requirements for RIAs, and whether permissible data that the advisor can take may itself vary by client tier. In addition, there is room in the agreement to outline what the firm and the advisor are allowed to communicate to clients regarding the advisor's change of employment (which could also vary by client tier).
How And When To Use The ACRES Agreement
Perhaps the most obvious use for the ACRES Agreement would be to set clear expectations between an RIA and a newly hired advisor before the advisor starts working with clients, so it's clear what will happen if the parties ever part ways in the future. As whether it's an advisor who is starting their career from scratch (but wants to know what happens if their first firm doesn't end up being their for-life firm), or one who is transitioning with existing clients and revenue (and wants to be certain that they don't lose the value of relationships they've already developed), the highly valuable yet intangible nature of 'relationship goodwill' created between an advisor and client while the advisor works for their firm means, similar to a pre-nuptial agreement signed before a wedding, it's a reasonable approach to both plan for the best but also have an agreement that prepares for the worst.
At the same time, firms reviewing their current non-solicit agreements (or lack thereof) could also use the ACRES Agreement as a template for discussions with their advisors so that both sides have more clarity on where current (and future) client relationships stand, to proactively address any potential misunderstands. Or perhaps even to update or 're-paper' existing advisor employment agreements into one that formalizes previously ambiguous terms and restrictions.
Further, the ACRES Agreement is not 'just' for firms; financial advisors starting at a new firm (or are newly promoted to lead advisor at their current firm) could introduce the template to the firm in order to negotiate for themselves, and get clarity on whether or how they would be able to solicit clients (from those they develop on their own, to existing client referrals they bring in, to simply personal friends and family members they may bring to the firm as clients) if they ever decided to leave in the future.
Notably, though, using the ACRES Agreement is not necessarily a one-time activity of setting the terms and signing the agreement. It also necessitates a process of labeling current client relationships (for an advisor with existing clients) and developing a way of tracking how new clients will be categorized in the future (so that it's clear, if there is a split down the road, which clients were added to each Client Category in the time from when the employment agreement was signed until the separation happened).
For example, a firm's CRM system could be used to add a custom field that 'tags' each current client (and new ones during the onboarding process) with their Client Category identifier (i.e., "Firm Client", "Individual Advisor Client", or "Joint Client").
While some firms might find that the ACRES Agreement likely covers the gamut of firm-advisor-client relationships and scenarios, others might want to have a more bespoke agreement with specific advisors or regarding certain clients. In these cases, engaging a lawyer to draft these documents could provide a more tailored solution to fit the needs of each party. Which means the ACRES Agreement is not meant to be a replacement for firms that already have or choose to develop a more customized employment agreement for their needs and circumstances; it's meant primarily to fill the void of advisors and firms that don't have anything at all but would like to get 'something' reasonably robust and (mutually) protective in place.
And again, as noted earlier, the ACRES Agreement is not intended for use in merger/acquisition scenarios (where a business transaction can and often should have additional restrictive covenants), nor in scenarios where an advisor is becoming a partner/equity owner (where the exchange of equity also can and often should have additional restrictive covenants).
Ultimately, the key point is that non-solicit agreements representing the investment that firms and their advisors both make into attracting and serving clients can leave each side feeling confident that their interests will be respected if the advisor and firm decide to separate in the future. Because the goodwill of client relationships do have substantial value, given the incredibly high retention rates for most advisory firms, and as reflected in the goodwill-driven valuation multiples of advisory firms themselves. Yet at the same time, advisor compensation is so directly attached to their clients and the associated revenue, advisory firms have to balance what's 'best' for the firm with what's 'best' for their advisors (or risk not being able to attract top talent that doesn't want to feel too 'handcuffed' in the first place).
And so our hope is that providing the ACRES Agreement as a template will enable advisory firms and their advisors to set better, clearer, and fairer terms for both parties, reflecting that both have a lot at stake and that neither may be entirely happy with how a client base is carved up under an ACRES Agreement. Yet, in the end, that's arguably the whole point of a negotiated compromise in the first place – where each party gives up at least a little something in order to find an arrangement that is mutually beneficial for everyone.