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When an independent retirement advisory is acquired, there is plenty of negotiation around the purchase price, says Peter Campagna, a partner with M&A advisory firm Wise Rhino Group. But when it comes to the employment agreement—including non-solicitation clauses and deferred compensation deals—there’s usually little room to maneuver.

“These agreements are usually heavy, and they are heavy no matter who the buyer is, and they are often non-negotiable,” Campagna says. “The [acquirer] is paying tens of millions of dollars and is folding you into a larger corporate policy structure, and at the end of the day, the seller doesn’t have to do it—it’s their choice. It’s just something that I often have to coach sellers on that they’ll need to capitulate.”

Campagna, who specializes in the valuation, selling and buying of advisory firms, says in the end, the price tag is what drives most dealmaking, and things like noncompete and non-solicitation contracts usually don’t hold up deals. Over time, however, they can matter when it comes to an acquiring firm wanting to ensure a new adviser or team doesn’t walk away with clients. In this instance, there are few executive compensation plans, vesting schedules or other bells and whistles that can ensure a long-term relationship.

“When it comes to things like deferred compensation plans, that’s generally a minor hook,” Campagna says. “A lot of these people are independent and have built their own business, and now they’re joining a bigger firm. … It’s usually the bigger legacy places—the wirehouses and retirement consultancies—that have big deferred-comp programs in place.”

This generally means there will be an employment deal in which an adviser will take a monetary hit if they should leave for a competitor or poach clients they had with the larger firm. Since noncompetes are already banned in some states, non-solicitation agreements tend to be the vehicle of choice, Campagna says.

“Where there is teeth is the non-solicit,” Campagna says. “They are not going to pay for an acquisition if the person can walk away the next day with the clients. [The client relationship] is truly what is being purchased, and that is the great concern of the purchasing firms.”

Earlier this year, the Federal Trade Commission forwarded a proposal to ban noncompete clauses in all 50 states. The proposal, which experts say will likely get a great deal of industry feedback and revision, is more targeted at the broader workforce, not financial advisers. Even so, as noncompetes cool as a method of keeping top talent, areas such as non-solicitation and ownership packages will continue to be key focus areas, according to recruiters in the space.

Rank & File

Stiff employment contracts have been common practice in recent years across the financial advisory space as consolidation and deal-making has been rampant, says Bill Willis, president and CEO of Willis Consulting, a financial adviser recruiting firm with offices in Los Angeles and Scottsdale, Arizona.

The potentially harder part of the agreement, Willis says, is ensuring that everyone on a team—not just the head honchos—are incentivized to stay, generally with fear of a monetary hit if they leave.

“If there’s a dollar amounted associated with a noncompete or non-solicitation contract, it gives it more legal teeth so someone won’t go the other way,” Willis says.

Sometimes, advisers will buy themselves out of a noncompete contract either with funds from their next employer or a bank financing, Willis says. But those kinds of moves are generally less common if the independent advisers are not managing the client money, but instead are relying on a central source for that management.

“If Johnny the adviser is doing his own thing, parking the money in his practice, it’s a lot harder to control and a bit more like herding cats,” Willis says. “If the money is centrally managed, then it’s harder for them to move the client away.”

Willis notes that laws differ by state when it comes to working with customers after leaving an employer. In California, it’s hard to enforce a non-solicitation agreement, whereas in New York it’s relatively easy to enforce. Willis says knowing local regulations is essential when engaging in an M&A transaction.

Carrots

“The legal contracts are the strongest and most compelling way that firms keep advisers and consultants in play,” says Louis Diamond, president of financial adviser recruiting firm Diamond Consultants. “But to me, that is almost a negative way of approaching it—I don’t want to keep people just because their contract says they need to stay, but because they want to stay.”

Diamond says a key selling point is showing top advisers a path to growth with the new firm—and how they can benefit from that growth. This can be done through post-acquisition equity in the firm, which usually has a vesting scheduled tied to how long an adviser stays. Perhaps more important, he notes, is that it “gives people a sense of belonging and sense that they are part owner of the firm.”

Private equity firms, which have been key players in the adviser acquisition space, often use shared equity packages, Diamond notes.

Another, related strategy is to show advisers how joining the new firm will aid in growing their business and client list, whether through lead generation mechanisms, retirement plan participant access or custodial services.

“Pretty much every adviser wants to grow, so if a firm can help them grow their business, they are more likely to stay,” he says.

Still, Diamond says, non-solicitation contracts will continue to be key as a way of retaining advisers.

“What any of these firms is buying are the people,” he says. “The people in the firm and their underlying relationships is the key element. … It makes them less marketable to other firms and protects them a little bit from leaving.”

Time Will Tell

Recruiter Willis says he is not personally in favor of noncompete contracts, as he believes the customer should decide who to work with. Realistically, however, it takes monetary incentives along with potential penalty to get people to stay.

“I’ve seen deals done with no such barriers, and it doesn’t go well,” Willis says. “People are living and learning as the RIA M&A progresses and people learn from the failures and successes.”

As all the advisory M&A that has taken place over the past decade matures, it’s inevitable that some advisers may start to look for their next move or hang up their practice.

That’s when a deal that incentivizes staying three, four or five years may come into play, says Campagna of Wise Rhino. It’s also when stock ownership can play an important part in keeping people invested and wanting to realize the growth of the firm.

But in Campagna’s experience, many of the successful advisers who are acquired tend to be hard-working people who love their job and like working with their clients.

“I work with a lot of people who are still super-motivated to work hard,” he says. “They’re just wired that way.”