Advisors Likely Heading for Exits in Broker Protocol Fallout

Waves of captive advisors are expected to break away from their firms in the coming months while still under broker protocol rules to minimize the risk of being sued by their employers, according to one market analyst.

But looking out toward the medium term, the advisor exodus could slow to a trickle as more advisory firms leave The Protocol for Broker Recruiting, according to analyst David DeVoe, managing director of DeVoe & Co. in San Francisco.

Captive advisors and brokers are “accelerating their exits and engaging with experts to explore leaving ahead of additional protocol defections,” DeVoe wrote in the latest installment of the DeVoe & Co. RIA Deal Book, which tracks mergers and acquisitions in the RIA segment.

The protocol lists 1,718 current active member firms. Last year, 17 firms withdrew from the protocol which came into being in 2004.

The agreement, a sort of nonaggression pact among broker-dealer firms, set ground rules for advisor recruiting.

Since October, Morgan Stanley, with about 16,000 advisors; UBS, with more than 6,800 advisors; and Citigroup, with about 1,000 advisors, announced they would leave the pact.

But Merrill Lynch and Raymond James have opted to remain, which has led to an industry divide.

The company departures from the broker protocol are a sign that wirehouses are fed up with advisors leaving as clients and assets follow the advisor out the door.

Firms that exit the protocol are also signaling that wirehouses and broker-dealers intend to vigorously pursue departing advisors in court.

Departing advisors – so the thinking goes – want to leave before their employers withdraw and create even more risk for advisors taking clients to a new organization.

“Ending their participation in the broker protocol seems to have led to some financial advisors to head for the door quickly while still under protocol rules, maybe just speeding up some moves that would have happened in future months,” said Chip Roame, managing director of Tiburon Strategic Advisors, a consulting firm that tracks the advisory marketplace.

Slowing Seen in the Medium Term

But once advisory firms decide to quit the protocol, the exodus of advisors would subside.

Either individual advisors or small teams of advisors would decide the risk of potential litigation related to the departure is too high, or the intimidation factor might deter any thought of leaving.

“If additional firms continue to withdraw from the pact, as anticipated, the industry will likely experience a decrease in breakaway activity over the mid-term,” DeVoe wrote RIA Deal Book’s fourth quarter report out this week.

Another development in the form of fewer financial incentives may contribute to the eventual slowing of departures.

In the past, a recruiting wirehouse might write a big check to entice an established advisor to join, but that practice may no longer be as widespread.

“If the wire(houses) stick to their guns to end writing big checks as signing bonuses, does the movement from one wirehouse to another become less appealing to incremental financial advisors?” Roame said.

Perhaps, which is why analysts eventually see an overall slowdown in advisors moving from one firm to another.

But among advisors who opt to move, it’s a good bet that many will leave the captive world and join the independent channel instead of moving from one wirehouse to another, Roame said.

Morgan Stanley lost 47 brokers in the fourth quarter and reported 15,712 advisors at the end of December, and UBS Wealth Management saw a net decrease of 203 advisors last year and reported 6,822 advisors at the end of 2017, according to news reports.

In the U.S., the largest of the wirehouses - Morgan Stanley, Merrill Lynch, UBS and Wells Fargo, employ an estimated 50,000 financial advisors.

Since wirehouses employ the lion's share of captive channel advisors, the withdrawal of one wirehouse from the protocol affects large numbers of advisors.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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