By Anne Field

Next-generation advisors working as employees at registered investment advisor firms are encountering an unpleasant challenge, which seems to be increasing: restrictive employment agreements preventing them from switching firms or striking out on their own. That is according to Michael Kitces, head of planning strategy for wealth management firm Focus Partners Wealth, co-founder of XY Planning Network, and self-proclaimed financial planning nerd.

In 2023, RIAs reported 531,400 employees with advisory functions, up 59% from 335,000 in 2009, according to the SEC. "I'm seeing very sad cases of advisors getting sued or trapped at firms because they can't leave," he says. Speaking with Barron's Advisor, Kitces discusses the rise of restrictive employment contracts, the role of private-equity investors, and why advisors should scrutinize a firm's leadership and culture before joining.

Can you give us background on employment agreements? Twenty years ago there were no employee advisors at independent firms. Either you were the owner or the administrative support, and almost everyone was commission-based. In that world, you didn't hire advisors because you didn't want fixed payroll salary obligations. But the shift to [charging fees based on assets under management, or AUM,] meant that you were making hundreds of thousands of dollars in revenues, sometimes millions, from all these clients you'd built great relationships with. And with your ongoing recurring revenue, you could afford to hire someone else to provide these clients with service -- especially people who might not be great at business development. That created a lot of jobs for Gen X and millennial advisors serving a firm's existing recurring revenue base. They would not have survived in the industry before.

What role does private equity play? Eventually, private-equity firms started noticing how profitable this was and started to buy up firms themselves. In a commission-based firm, the first day the owner doesn't come in, the business goes to zero. With an AUM firm, the first day the owner doesn't come in, because clients are all being serviced by a great Gen X or millennial service advisor, the business is just as profitable as it was the day before. Advisory firms had transferable value they never had in the past.

But firms have become increasingly anxious about what would happen if those service advisors were to leave. And that led to more restrictive employment agreements. In fact, the biggest issue that next-generation employee advisors have to deal with today is these agreements. They've become increasingly common in the independent channel, especially among firms taking outside capital.

Why are these agreements increasing at independent firms? It's ironic because, classically, one of the most appealing parts of being an independent advisor is having control over your practice. Yet in reality, employee advisors at independent firms may have the least autonomy, because they're working within a very restrictive employment agreement that says they can't solicit clients from any of the firms they work for or outright bars them from being in the business for a period of time.

Can you describe employment contracts in more detail? There are a few types of restrictive covenants that may show up in advisors' employment agreements. Nonsolicit agreements forbid you from asking your prior clients to come/follow you to your new firm. They have to follow you of their own volition without being solicited. "Nonaccept" means that, even if clients voluntarily follow you, you're not permitted to accept them as clients if they came from the prior firm. And noncompete agreements say that you're not allowed to even be in the business of giving financial advice to clients, typically with some geographic constraint. They say something like "cannot open an advisory firm within 50 miles of the prior firm or within 50 miles of any branch location of the prior firm." Nonsolicits are most common. Nonaccepts are less common. Noncompetes have some variability by state. For example, some states like California don't allow them at all.

What choice do advisors have ? Restrictive employment agreements have quickly become a hot issue with employee advisors in a way that never existed before. While this is true for firms in general, it's amplified in firms that have a private-equity stake, because it's common for PE firms to require that employment agreements are implemented if they haven't been already. The private-equity firms have made a big investment, and they don't want their advisors to walk out the door and take millions of dollars from the firm. A lot of next-generation advisors are struggling with the fact that it would be destructive to their career to leave their firm because they'd have to literally start over. That is especially difficult if you took the job because you're not good at building your own client base.

There's a threat even at firms without covenants? Even for advisors who haven't had one of these agreements put in front of them, there's a looming threat the firm will do so -- either because they decided to do it on their own, or because a PE investor is requiring it. At any time, you could suddenly find yourself faced with a restrictive employment agreement. You can choose not to sign it, but then the firm can terminate you. It's stressful for everyone. At some firms, even if they're not sure they're going to win, they'll sue every advisor who leaves because they want to make sure other advisors don't try it.

Do you have advice for those who feel compelled to sign? There's a huge premium on salaries -- 30-plus percent higher -- for advisors who get a Certified Financial Planner designation and can provide great service to clients. It's a very big benefit if you're trying to get hired as a service advisor because there's so much interest in financial planning. But you run the risk that the firm you choose is one you're going to be stuck with indefinitely. The pressure is to choose really, really well when you're looking at joining a firm. Look at the leadership and the culture, because you may be there for a long time.

The fact is, if you can get your own clients, you can control your own destiny. But at the same time, for a lot of advisors, their gift is giving clients great service and advice. Their gift is not finding their own clients.

Thanks, Michael.

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April 28, 2025 14:07 ET (18:07 GMT)

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