Nervous Advisors Wait Out Broker Protocol Standoff

By Cyril Tuohy

Last fall, three big wirehouses dropped a bombshell on the broker recruiting world with plans to opt out of an agreement to provide safe passage to advisors leaving for another firm.

Now the agreement known as the Protocol for Broker Recruiting appears to be very much in a holding pattern as hundreds of other firms wait to see how the schism plays out and advisors and broker teams think twice before jumping ship.

“The fact that two major players walked away suggests to me that others are waiting to see what happens,” said Philip Aidikoff, a securities attorney in Beverly Hills, Calif. “Over the next six months to a year, we are going to have a better feel, I think, as to how other firms are going to deal with this."

Last October, after more than a decade of relative calm, Morgan Stanley announced it was leaving the Broker Protocol 13 years after joining the landmark framework. The protocol is designed to pre-empt litigation when individual and teams of advisors, lured by big upfront bonuses, leave one brokerage house for another.

UBS Wealth Management and Citigroup, who also represent thousands of advisors managing billions of dollars in assets, soon followed.

Other nationwide giants such as Merrill Lynch and Wells Fargo remain, despite rumors of impending departure, and regional powerhouses Raymond James and Stifel appear steadfast in support of the agreement.

Nearly 1,800 firms are party to the protocol.

The schism revealed deep frustrations with brokers taking their client books of business to start anew in the independent channel, which is gathering assets at warp speed.

Beneath the choppy surface, brokers seemed to give pause as 81 advisor teams moved to different a broker dealer in the first quarter. That is down from 148 teams that moved in the first quarter last year, according to an industry tracker.

A Battle Over Control

At its core, the dispute represents a long-simmering tug of war in the battle for control between the advisors and their employers, said Louis Diamond, vice president and senior consultant with Diamond Consultants, an advisor recruiting firm.

Advisors want more control, but the firms they work for, or are affiliated with, want to give them less. Leaving the protocol was seen as a signal that brokerage firms were no longer going to abide by a code of gentlemen’s conduct and instead pursue advisors in court.

“When UBS and Morgan Stanley withdrew from the protocol, many advisors saw it as an indictment on advisors’ sense of control and ownership over their business and client base,” Diamond said.

If Merrill Lynch and Wells Fargo join Morgan Stanley and UBS for the exits, the protocol might well face collapse, he added.

Not everyone agrees and fears of the protocol disintegrating with the exit of a handful of large firms are overblown, other market observers said.

“I don’t think it’s going away,” said Frank LaRosa, CEO of Elite Consulting Partners, a financial advisor recruiting company.

Morgan Stanley and UBS could even rejoin the pact, he said.

Leaving the agreement isn’t much of a selling point for brokers and advisors. Why join a firm that impedes a broker’s departure if and when the time comes?

Stifel Financial’s CEO Ronald Kruszewski offered much the same argument in a recent conference call with analysts.

Restricting advisors from moving to a new employer and firms who leave the protocol is bad for the securities business, while everyone – firms, advisors and clients – benefit when companies remain, he said.

“Being out of the broker protocol is not good for anyone,” Diamond said. “It’s harder to recruit advisors and more expensive.”

The protocol is about to be tested further as 10-year retention deals signed at the height of the financial crisis expire later this year and next, giving a new group of brokers the opportunity to consider a move, Diamond said.

The Latest Legal Wrinkle

As both sides stare each other down in apparent stalemate, another wrinkle emerged in July when a Georgia appeals court judge ruled that the protocol doesn’t invalidate advance-notice provisions in state-based employment agreements.

The ruling could make it more difficult for brokers and registered investment advisors who change jobs at firms that belong to the protocol.

In April 2014, four brokers resigned on the spot from Aprio, formerly known as HA&W Capital, without prior notice after Morgan Stanley claimed the protocol would shield them from having to comply with advance-notice provisions.

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