Broker Protocol Faces Uncertain Future After Morgan Stanley Decision

The financial services world is buzzing with speculation on the potential fallout from wirehouse Morgan Stanley's decision to abandon the broker protocol.

Late last month, the blue-chip brokerage house declared it was leaving the protocol, an agreement to prevent lawsuits in the wake of departures to other firms.

Industry experts wondered which, if any, brokerages would follow in opting out of the “Protocol for Broker Recruiting,” and what the ramifications would entail.

“If it stops at Morgan Stanley, there’s not much effect,” said David DeVoe, managing partner of DeVoe & Co., which tracks RIA transactions of at least $100 million in assets. “But if others join it would have a dampening effect on those brokers joining RIAs.”

The protocol is designed to prevent expensive lawsuits between firms raiding one another for talent and pulling out of the agreement could open the flood gates to a more litigious era.

Or, it could create a near-term surge of activity as advisors try to get ahead of the protocol rule before wirehouses join Morgan Stanley, DeVoe said.

Since early October, at least 10 individual advisors or advisory groups with hundreds of millions worth of assets under management have left the wealth management division of Morgan Stanley for independent broker-dealers or competing wirehouses, according to a database of advisors on the move.

The advisory group with the most assets, Robert S. Gilman, Robert Kushel, Jed A. Morton and David Stanford, took their $1.6 billion book of business to JP Morgan Chase & Co. in late October, according to the database.

More than 1,500 firms participate in the protocol, created in 2004. In the last decade, many have found that the independent channel offers greener pastures for advisors in search of more freedom and control.

The new army of smaller broker-dealers party to the protocol seemed to the jostle the coterie of large, dominant wirehouses comfortable with swapping advisory talent among themselves. That caused some industry experts to accuse the newcomers of gamesmanship.

Could Morgan Stanley’s departure from the broker protocol indicate that advisors departing for the independent channel is hurting wirehouses more than they let on? Perhaps.

Independent Channel’s Inexorable Pull

But as managers at other wirehouses mulled the latest exit by Morgan Stanley, the inexorable pull of the independent channel continues, according to the latest market data from Schwab Advisor Services.

The number of Registered Investment Advisors (RIA) with the Securities and Exchange Commission grew by 75 percent to 199 new firms from 2012 to 2016, the new analysis by Schwab found.

New RIA firms established in 2016 alone represent nearly $55 billion in assets under management, the survey found.

But it’s the large firms, those with more than $300 million in assets under management, that seem to be drawn to the independent channel.

The percentage of firms with more than $300 million in assets under management going independent has more than doubled since 2013, the survey found.

Assets managed by those largest firms rose 15 percent to $35 billion in 2016 over the previous year, Schwab found.

Certainly, there are plenty of resources to help and encourage advisors to join the RIA ranks and help advisors succeed there, said Jonathan Beatty, senior vice president of sale and relationship management with Schwab.

“As increasing numbers of advisors choose this model, we are committed to providing the education, resources, and ongoing partnership to help them make a successful and sustainable transition,” Beatty said.

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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