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December 19, 2017 Law & Regulation No comments
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Industry Divided Over Broker Protocol

By Cyril Tuohy InsuranceNewsNet

Morgan Stanley and UBS Wealth Management are bailing out of the broker protocol, but Merrill Lynch and Raymond James are staying put.

So have emerged the fault lines on either side of the protocol, a framework of sorts, designed to prevent lawsuits filed by brokerage firms against competitors for poaching retail advisory talent.

Morgan Stanley’s restraining order against a New Jersey broker who left for Commonwealth Financial Network earlier this month is a signal that the wirehouse will aggressively pursue breakaway brokers.

The message from Morgan Stanley was clear: We will not tolerate broker-dealers and independent registered investment advisors (RIA) such as Commonwealth Financial, siphoning off advisors.

Truce Comes to an End

The truce-like atmosphere that has prevailed for more than a decade under the protocol has changed.

Impartial conduct standards imposed by the fiduciary rule raise the liability of brokers who leave for a big payday in exchange for selling proprietary products without disclosing the incentives, said Larry J. Rybka, president and CEO of Valmark Financial Group.

But even the big payday arrangements are changing.

Related to the protocol exits is the decision by wirehouses to stop paying big signing bonuses, said Chip Roame, managing partner of Tiburon Strategic Advisors, a research and consulting firm that covers the advisory market.

In the short term, some financial advisors will be heading for the exits while still under protocol rules, but longer term, the advisor exodus may well slow.

Advisors who no longer stand to receive a big check, but risk of being sued if their firm no longer belongs to the protocol, may have a dampening effect on advisors leaving.

“If you move, and they sue you like in the old days, that may slow the trend,” Roame said. “Some advisors don’t want to be sued.”

Jury Still Out

With more than 1,500 firms participating in the protocol, it’s not clear how many other brokerage firms will follow Morgan Stanley and UBS, and abandon the arrangement.

A survey conducted before Morgan Stanley’s late-October departure found that joining the protocol led to higher advisor turnover as brokers left one brokerage shop for another with near impunity.

But the research also found that within the protocol, investor complaints dropped as advisors remained focused on their clients and were less compelled to move into management.

“Abandoning the protocol would result in counterproductive consequences, including increased lawsuits and potential reputational risks for financial advisors and the profession,” wrote Dennis Zank, COO of Raymond James Financial, in a co-signed letter.

The relationship between advisor and client is the linchpin of the advisory industry and advisors should be allowed to move or “affiliate” with firms if it’s in the best interest of clients, Zank said.

Clients are often said to “belong” to an individual advisor or advisory team responsible for nurturing the relationship, not the brokerage firm.

A Changing Landscape

Recent protocol ruptures underscore an advisory landscape marked by the rise of the independent distribution channel.

Not only is the independent channel gathering more assets at a faster pace than other distribution channels, but advisors leaving wirehouse and captive distribution channels for the independent channel participate in what is overwhelmingly a one-way flow.

Since the protocol came into being in 2004, a plethora of services – from compliance to software to RIA consolidators – have cropped up to serve advisors with support on par with the national wirehouses and big broker-dealers.

Leaving the protocol is an opportunity for brokers and advisors to redefine themselves and become leaner and more effective competitors, according to Joe Duran, founder and CEO of United Capital Financial Life Management, an RIA.

Firms that leave the protocol have plenty of talent and money and it would be a mistake to bet against them, Duran wrote recently.

More firms will exit the protocal agreement, Duran predicts.

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

© Entire contents copyright 2017 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

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