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Why the Broker Recruiting Protocol Is Here to Stay

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Lately, there’s been much speculation among advisors that the wirehouse firms are mulling a pullout from the broker recruiting protocol, which they adopted in 2004. With a continued exodus from the wirehouses, some advisors and other industry players speculate that these firms may either withdraw from the recruiting protocol or actively employ underhanded tactics to circumvent it.

A branch manager at one regional firm told me he’s planning for the return of the bad old days when temporary restraining orders were routinely deployed against departing wirehouse advisors.

My view is that while some of the wirehouses may be experiencing buyer’s remorse, they’ll stay the course with the protocol. That’s because it’s in their best interest to do so.

It’s worth remembering what prompted the major brokerage firms to adopt the protocol in the first place: The original impetus was the passage of the Graham Leach Bliley Act

The act prohibited financial institutions from sharing private information with other financial institutions without client consent. Hiring firms could no longer prepare account-transfer paperwork that included data on client holdings, Social Security and account numbers in advance of a broker’s move.

The other catalyst for the protocol’s formulation was, in my view, the steady stream of embarrassing newspaper articles detailing the ugly disputes that arose when advisors changed firms. Departing brokers were routinely slapped with temporary restraining orders (TROs) by their old firms, while both firms bickered over whether clients were free to follow their advisor to the new firm or not.

The subtext of the dispute to investors was clear: Major brokerage firms cared more about their own interests than those of their clients. They acted as if they viewed client assets as their own personal property. Investors who chose to do business with these firms could count on being caught in the middle of a contentious legal dispute should their advisor elect to switch firms.

Understandably, this was not the image that senior management at the wirehouses wanted to project to well-heeled investors.

Best for All Players

Especially today, with regional brokerage firms, RIAs, independent broker dealers, private banks and asset management firms all vying for the attention of upscale investors, major brokerage firms would be loath to blacken their names with a TRO-centered strategy. In fact, it’s in the self-interest of major firms to do their best to ensure that clients have a positive experience with them and to maintain the highest standards of conduct in all circumstances.

The recruiting protocol fits in nicely with proposals for a new fiduciary standard, which will require advisors to act in a client’s best interests. The protocol’s stated goal is to “further client interests of privacy and freedom.” How could a firm opt out of the protocol and then profess to be committed to acting in the best interests of clients?

Major firms are laser focused on ramping up their recruiting efforts. Advisors are reluctant to join non-protocol firms, because they know that it will be trickier both to transfer their assets to such a firm and to leave it later on.

There have been cases reported in the press which in my opinion have been erroneously cited as evidence that firms are rolling back the protocol. A closer look at each case, I believe, shows that the protocol is not being subverted. 

One widely read Bloomberg News story focused on an advisor who joined Oppenheimer & Co. from a small non-protocol firm, Euro Pacific Securities. A careful reading of the facts makes it clear this dispute is really about whether or not the advisor disclosed the fact that had a prohibitive noncompete contract in place at Euro Pacific to his prospective employer.

Similarly, earlier this year, Merrill Lynch filed a lawsuit against a team of departing advisors who joined UBS. The dispute revolves around the fact that the advisors allegedly took electronic devices and changed client records in contravention of the recruiting protocol.

Currently, 1,300 firms have signed the broker recruiting protocol. In 2004 when the agreement began, the protocol was a pact among just the four wirehouses. More firms sign on every year.

The recruiting practices outlined in the broker recruiting protocol will remain normative practices for the foreseeable future — and that’s good news for firms, advisors and clients.


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