The original intent of the Protocol for Broker Recruiting (the Protocol) was to limit the scope of litigation if you recruit financial advisers from a competitor. Today, according to the departing Big Four wirehouses, the Protocol is obsolete and ineffective, straying beyond its real purpose, which is protecting clients’ assets and privacy.
Whether or not you decide to leave, too, the effect on your firm’s recruiting practices may be substantial.
How the Protocol Formed: 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. Conceived initially by Merrill Lynch, Smith Barney and UBS, the Protocol provides general guidelines if you want to recruit successful advisers who already have a job. The 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 sued 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. The Protocol addresses the awkward situation of investors wanting to follow their most trusted advisers to a new firm.
The Protocol also establishes rules for advisers who solicit former clients. It only allows you to keep essential information, such as names, addresses and phone numbers, to contact previous clients. You can’t take confidential details on account numbers, bank statements or social security numbers when you move to another firm.
Why Founding Members Are Exiting the Protocol
The Protocol applies to an independent broker-dealer and investment adviser. 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.
Wirehouses didn’t anticipate a future where over 1,700 companies agreed to the Protocol, so the dominoes began to fall on October 30, 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 going.
“Over time, the Protocol has become replete with opportunities for gamesmanship and loopholes,” the release states. Morgan Stanley points to the fact that there is no formal vetting process. Any independent broker-dealer or registered investment advisers can join and leave at will with minimal notice.
The Protocol, simple as it may be, contains neither a formal vetting process nor an enforcement mechanism. There is concern that more firms will keep joining the Protocol, exploit the benefits of recruiting within its framework and exit the Protocol shortly after.
“Firms have unilaterally made exceptions to the scope of the Protocol, undermining the objective of a universal set of rules,” according to Morgan Stanley’s press release. Similarly, UBS is no longer a member for the same reasons. As their co-president Tom Naratil admitted in a recent interview, “once a large rival left, we left.” The dominoes continue to fall in 2018 with more big brands 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. The next to move may be your own if you want to prevent unethical companies from gaming the agreement and poaching your best employees.
The decision to leave isn’t easy, but more firms continue to believe that the Protocol has become ineffective. Citigroup has already exited the Protocol, even though it doesn’t have the same number of advisers as Morgan Stanley, which may portend more small companies leaving soon. 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. Thousands of companies are still on board with the agreement, but that may change soon if wirehouses continue to crack down on “raiding” a broker’s books.
Depending on your perspective, you may see the collapse of the Protocol as a win for clients’ fiduciary rights. Another way to look at it is, wirehouses have grown weary of losing business to independent advisers.
Exiting the Protocol gives wirehouses a way to limit opportunities for those who would leave to form rival ventures. They would also 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 the death knell of broker recruiting as you know it. Detractors of the agreement say it’s obsolete; proponents say it’s still useful because of it’s a longstanding recruiting precedent.