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May 01, 2011 at 08:00 PM
Some Wall Street firms belonging to the Protocol for Broker Recruiting, commonly referred to as “the Protocol,” are responsible for a troubling trend: They are creating “exceptions” to the Protocol’s original mandate in order to stem the tide of breakaway brokers.
Patrick Burns of the Los Angeles law firm that bears his name knows just about everything there is to know about the Protocol—from its launch in 2004 by UBS Financial Services, Merrill Lynch and Citigroup/Smith Barney, to its current state—and he says the original code of conduct language under the Protocol was designed to be “pretty straightforward.” It states that when reps of member firms leave to go independent, “as long as they take their basic client information with them, and leave one protocol member firm and join another, they won’t get sued or have any other type of legal action initiated against them as part of the departure,” Burn says.
Burns recently released a white paper called “Opening the Floodgates to Independence: A Brief History and Impact of the Protocol for Broker Recruiting,” that details the effect the Protocol is having on Wall Street and registered investment advisors (RIAs). The paper notes that the Protocol membership has grown to 650 firms, and includes broker-dealers and independent advisory firms. Burns notes that joining the Protocol is really quite easy. Firms must only notify the Securities Industry and Financial Markets Association (SIFMA) that they wish to become members.
The Protocol has not only become an excellent recruiting tool, but also a “backdoor” for breakaway brokers to easily depart a firm. It is this ability to break away that has Wall Street “more than concerned,” Burns says in the paper, “with several hundred independent RIAs and numerous independent broker-dealers now part of their once 'exclusive’ club.”
Burns writes that Discovery Database has found that 12% of advisors change firms each year, and the Protocol has “streamlined this process by removing a majority of the uncertainty, costs and fear from both advisors and member firms.” Burns calls the Protocol “a double-edged sword,” because while it “works fantastically” as a recruiting tool for members, it can also provide an easy way for brokers to head the other way and depart from member firms.
“Wall Street firms need the Protocol to keep their recruiting engine functional,” he says. Yet “some Protocol members have qualified their membership status by establishing provisions designed to weaken the Protocol and tilt the playing field back into their favor.”
Of U.S. Trust and ‘Garden Leaves’
The paper notes that one recent diversion from the Protocol was the U.S. Trust unit of Bank of America Merrill Lynch creating a “Garden Leave” policy requiring departing advisors to provide 60-days notice before leaving. While U.S. Trust is not a member of the Protocol, Merrill Lynch is a member. Burns notes that during this Garden Leave period, “contact with clients must be consistent with the firm’s policies and most likely would hinder” the departing advisor’s ability to convince clients to follow the advisor to a new firm, due to the length of time of the transition and the uncertainty that might arise in the client’s mind.
