Four Essential Contract Components for Breakaway RIAs

It may sound obvious, but before you consider becoming a breakaway RIA, it’s essential to understand what it means. Financial advisors considering leaving a wirehouse or brokerage to join an existing registered investment advisory firm (RIA) are known as breakaway advisors. By becoming a breakaway RIA, you can operate as your own business without having to start your own business. But before you decide to become a breakaway RIA, you must get a copy of your contract to ensure you understand its four vital components. Failing to do so could make your transition needlessly difficult. At My RIA Lawyer, we can help you understand your contract to plan your future the right way.

Understanding Non-Solicit Clauses

Does your contract contain a non-solicitation clause? If so, the specifics of that clause will be vital to know because they can significantly impact your planning. For example, the non-solicit clause may prevent you from soliciting current clients, prospective clients, employees, independent contractors, vendors, and more. Often, the non-solicitation clause will state that you cannot solicit any party to the firm if you did not know that person before joining the firm.

If you are considering becoming a breakaway RIA, you are most likely wondering if you can take your book of business with you. It will depend on the specifics of your contract. There is a chance that your contract will prohibit you from doing so. Finally, If your contract has a non-solicitation clause, be careful about the conversations you have with your clients, even when you are still working for the firm.

Navigating Non-Compete Clauses

The purpose, essentially, of a non-compete clause is to protect an employer from spending a lot of time and money on an employee’s development, only for the employee to leave and work for a competing company.  The specifics of a non-compete clause vary by state and, therefore, can have significantly different impacts depending on the state’s laws.  Generally, however, the more broad and vague a non-compete clause is, the less likely it is to be upheld if challenged. And the more narrowly construed and specific, the more likely it will be upheld.

Specific restrictions such as jurisdictional restrictions or time restrictions tend to be upheld. A jurisdictional restriction may prevent you from working for any competing business within 50 miles of your office.  A time restriction could prevent you from competing with your current employer for up to two years.

Update: In 2024, the FTC’s non-compete ban was set in motion.

Importance of Carve-Outs in Your Contract

Suppose you went to a firm with an existing book of business. In that case, check your contract to ensure it includes a carve-out that exempts your previous book of business from the restrictions of a non-solicitor non-compete clause. If the contract you signed does not include a carve-out, you may have to hand over your book of business to your employer for free. You also want to find out if there is a carve-out for any business you originated while working with your employer. Your previous book of business and any business you generated could be exempt from the restrictions specified in your contract. Before leaving your current job to become a breakaway RIA, you must know and understand this crucial information.

Jurisdictional Differences and Their Impact

As we mentioned, the specifics of non-compete clauses and non-solicit clauses vary by jurisdiction. For example, in one jurisdiction, reaching out to clients on LinkedIn may constitute a solicitation, while in others, it does not. Providing your clients with your personal contact information, such as your cell phone number, before your departure may be considered a solicitation in some states, while it may be perfectly acceptable in others.

It is imperative to understand what jurisdiction applies to your contract and who will handle any disputes: state court, federal court, arbitration, mandatory mediation, etc. Such information will help you determine whether or not you would like to dispute any aspect of your contract. Contact My RIA lawyer for assistance with this process.

Successfully Breaking Away From Contract

Successfully breaking away requires well-thought-out planning. Non-solicit clauses, non-compete clauses, jurisdictional differences, and possible carve-outs will all significantly impact your ability to break away and the timing and planning necessary to do so.

Don’t take the leap without doing your research first. And always keep in mind that you don’t have to figure this all out on your own. At My RIA Lawyer, we can help you understand your contract and the restrictions you are facing.  Let us help you make the transition as smooth as possible so you can get back to focusing on what you do best.

My RIA Lawyer: Good Compliance Is Good Business®

Don’t make the jump to breakaway RIA without knowing and understanding the specifics of your contract. Avoid potential legal action and pave the way for a smooth transition by allowing our “regulatory compliance geeks” to guide you through the process. At My RIA Lawyer, we help financial advisors and firms navigate the legal complexities of the RIA world.

We work virtually, long-distance, with clients from coast to coast. Contact us to schedule a consultation with our RIA compliance nerds.

Watch below as Leila Shaver, Securities Attorney, Compliance Nerd, RIA Expert, and Founder of My RIA Lawyer, explains the vital components of a contract for anyone considering becoming a breakaway RIA.

 

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm. It is not intended to substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.