The Collapse of the Protocol for Broker Recruiting and Its Effects on Salary

Broker Recruiting-Salary

The Protocol for Broker Recruiting (the Protocol) was established in 2004 and is an agreement regarding broker recruitment. The Protocol allows brokers to move between firms and take their clients with them to the new employer. Today, according to the four wealth management firms that started it, the Protocol is obsolete, ineffective, and strays beyond its real purpose, which is protecting clients’ assets and privacy.
A firm’s decisions as to whether it should withdraw from the Protocol can have a significant impact on its recruiting practices.

The Formation of the Protocol – Clients Caught in the Broker Recruiting Crossfire

Since 2004, the Protocol has limited litigation between wirehouses if a registered representative leaves one participating member for another. As initially conceived by Merrill Lynch, Smith Barney, and UBS, the Protocol provides general guidelines for firms that want to recruit successful representatives who already have a job. The lingering question is—how do you protect the client-adviser relationship when advisers transition to a different firm?

Before the Protocol came into effect, lawsuits were common as firms would sue departing representatives to win temporary restraining orders against moving a client’s assets to a new firm. Due to legal precedent, a client’s assets were inevitably frozen until all parties agreed to terms in arbitration. Today, the Protocol addresses the awkward situation of investors wanting to follow their most trusted representatives to a new firm.

The Protocol also establishes rules for representatives who solicit former clients. The guidelines only allow representatives to keep essential information, such as names, addresses, and phone numbers, in order to contact previous clients. Representatives are prohibited from taking confidential details including account numbers, bank statements, or Social Security numbers when they move to another firm.

Why Founding Members Are Exiting the Protocol

The Protocol applies to independent broker-dealers and investment adviser, but there are no special requirements other than complying with standard industry regulations. This open-door policy is precisely why founding members are leaving the agreement, which only requires a 10-day notice.

In November of 2017, Morgan Stanley decided to leave the Protocol under the guise of a new business model. Morgan Stanley’s only press release on the decision outlined the firm’s reasons for leaving. “Over time, the Protocol has become replete with opportunities for gamesmanship and loopholes,” the release states. Morgan Stanley points to the fact that there’s no formal vetting process. Any independent broker-dealer or registered investment advisers can join and leave at will with minimal notice.

As simple as the Protocol may be, it contains neither a formal vetting process nor an enforcement mechanism. There’s concern that more firms will keep joining the Protocol, exploit the benefits of recruiting within its framework, and then exit the Protocol shortly thereafter.

According to Morgan Stanley’s press release, “Firms have unilaterally made exceptions to the scope of the Protocol, undermining the objective of a universal set of rules.” Similarly, UBS is no longer a member for the same reasons. As UBS’ co-president Tom Naratil admitted in a recent interview, “once a large rival left, we left.” The fallout has continued with more large firms following Morgan Stanley’s lead.

Which Firms May Exit the Protocol Next?

It’s difficult to predict anything in the financial services industry, but the trend is clear—more firms are leaving the Protocol. Firms are consistently analyzing whether they want to prevent unethical companies from gaming the agreement and poaching their best employees.

The decision to leave isn’t easy, but more firms continue to believe that the Protocol has become ineffective. Although Citigroup doesn’t have the same number of advisers as Morgan Stanley, it has already exited the Protocol. Other wirehouses, such as Wells Fargo and Merrill Lynch, have increased litigation aggressively, alleging that brokers violate the Protocol.

How the New Environment Will Affect Salaries and Careers

Leaving the Protocol is becoming the new norm. Although thousands of companies are still on board with the agreement, that may change soon if wirehouses continue to crack down on the “raiding” of a broker’s books.

Some people believe that the collapse of the Protocol is a win for clients’ fiduciary rights. However, another way to look at it is that wirehouses have grown weary of losing business to independent advisers.

Exiting the Protocol gives wirehouses a way to limit opportunities for those who intend to leave to form rival ventures. These firms ultimately gain more control over the salaries and commissions that talented advisers can command. However, this strategy appears to be pushing brokers into the independent space, which is more lucrative.

The collapse of the Protocol isn’t necessarily the death knell of broker recruiting. While detractors of the agreement say it’s obsolete, proponents say it’s still useful since it sets a longstanding recruiting precedent.