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Will More Firms Leave Broker Protocol?

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Morgan Stanley’s recent decision to leave the Protocol for Broker Recruiting has thrown a monkey wrench into the current recruiting environment, which in general has been on a tear along with the stock market.

It also raises the question of whether more of the roughly 1,600 firms that agreed to the protocol will depart and what impact Morgan Stanley’s exit could have on recruiting at the wirehouses and more broadly.

According to industry veteran Phil Shaffer, more large firms may abandon the protocol.

That’s because the wirehouse firms — Merrill Lynch, Morgan Stanley, UBS and Wells Fargo — want to protect the roughly one-third of the wealth industry’s client assets they now manage, and sources like Cerulli Associates “say that share continues to shrink,” said Shaffer, CEO and founder of Halite Partners, an RIA in Columbus, Ohio, in an interview.

Morgan Stanley and the other wirehouse firms agreed to the Broker Protocol in 2004 to facilitate the movement of registered representatives from one firm to another without violating non-solicitation clauses or Securities and Exchange Commission Regulation S-P, which is intended to protect client privacy.

According to Morgan Stanley, the protocol is “replete with opportunities for gamesmanship and loopholes.” As it is worded today, the protocol “is no longer sustainable,” the firm said in a statement in late October. “Exiting the protocol will allow [Morgan Stanley] to invest more heavily in its world-class advisors and their teams, helping drive additional growth opportunities.”

By leaving the protocol, “You’re just building a wall around yourself to keep advisors and assets in,” explained Shaffer, who also co-founded Graystone Consulting, a unit of Morgan Stanley Wealth Management, where he served as head of institutional consulting from mid-1993 to June of this year.

“Sadly, I think it likely will be an industry trend,” he added. That’s because if one major firm leaves and the others do not, then potentially the departing firm could recruit “without worry or legal issues” related to temporary restraining orders or other constraints.

“Everyone is going to hold their breath and see who goes [next] and what happens then. If [a second firm] leaves, how aggressive will the [first] firm be legally? This will be tested by year end — that’s my hunch.”

Overall, some other large firms might choose to not take the legal and financial risks tied to recruiting reps with non-protocol firms and to leave the protocol, Shaffer says. “Or you can choose to keep an open culture, like Raymond James,” and stay in the protocol.

Raymond James issued a statement last week stating that it intends to remain in the pact.

“We believe that the client’s interests should come first and that advisors are better positioned to serve client needs with the choice of which firm to affiliate with,” said Tash Elwyn, head of the employee channel Raymond James & Associates, in an interview.

“And potentially, in light of one firm’s decision [to leave it], there’s some uncertainty tied to future of the protocol. We wanted to make public our decision that choice is an integral part of serving clients and putting clients truly first, and that we will continue to embrace the benefits of the protocol for advisors and clients,” Elwyn said.

Advisors’ Loss?

The recruiting scene could also be affected by Morgan Stanley’s departure in other ways — by affecting the value of advisors’ books of business, for instance.

“For those advisors with a non-protocol firm, the value of their business has diminished,” Shaffer said. This is because recruiters have to “factor in legal fees and what percent of a book [of business] advisors will bring over when leaving, given the aggressive stance a non-protocol firm may take.”

As a result, recruiting deals could become “more back-end than front-end loaded,” he says, meaning that advisors get less in up-front payments than before and more in deferred payments.

A recruiting firm reaching out to a registered rep at a non-protocol firm will “worry” about how much of the rep’s book of business will move to the new firm, Shaffer adds.

“Deals might have a large part of a bonus tied to assets brought to the new firm over time,” he explained. This way, the hiring firm can insulate itself from what potentially might be “a limited book of business” moving over from the non-protocol firm.

Generally, advisors move with 85% of the clients, according to Shaffer: “What if you expect 60%? You will structure the deal differently. The advisor loses economically in this transaction … by becoming mobile.”

More Dynamics

Overall, the exit of firms from the protocol “doesn’t help advisors and clients,” the veteran industry watcher says. “It hurts clients.”

If an advisor leaves a non-protocol firm and has a temporary restraining order or other legal hurdle, “that separates the valued client and the advisor for days, weeks or longer,” Shaffer explains.

“Look at market returns, the most important of which happen over a limited number of days. If you can’t reach your advisor then and you don’t know in advance when [those days] will be, the client probably will feel an impact, which could be on the downside,” he stated.

If the client cannot work with the departed rep, he or she will need to reach out to a new advisor filling in. That rep may not know the best strategy for the client. “Thus, for the client, there’s no winning in that scenario.”

While the exit of a major firm or two from the protocol “could slow things down” in the recruiting world, it won’t put an end to advisor movement. “By no means will advisors not leave a non-protocol firm,” Shaffer explained.

“Entrepreneurially minded people are still going to leave firms across the industry, and the wirehouses certainly are going to feel the brunt of this trend,” he said. “Firms exiting the protocol is not going to stop it.” 


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