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Practice Management > Building Your Business > Recruiting

Will More Firms Leave the 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 general has been on a tear along with the stock market.

It also raises the issue 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 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 yearend — 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 in early November explaining that the firm intends to remain in it.

“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 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 explained to Investment Advisor.

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 backend than frontend loaded,” he says, meaning that advisors get less in upfront 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 helps 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 down side,” 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. “Exiting the protocol is not going to stop it.”

According to Mark Elzweig, who heads an executive-search consultancy in New York, “Advisors who want to leave non-protocol firms [like Morgan Stanley] need to be indemnified by their prospective employers.” Though this may not be an issue for large producers joining other wirehouses or regional firms, it could be a problem for smaller producers, who could find that rival firms won’t want the expense of settling a potential lawsuit and will step away from hiring them, he says.

Plus, Morgan Stanley’s decision to leave the protocol will likely make it harder for its advisors to go independent. “I’m sure that’s the idea,” said Elzweig. “Hopefully, the courts will rule on this issue soon.”

As of Sept. 30, Morgan Stanley has 15,759 financial advisors vs. 15,777 on June 30 and 15,856 a year ago. Its FAs have average client assets of $146 million; their yearly fees & commissions average $1.07 million. Total assets for the wealth unit are $2.31 trillion, 43% of which is fee-based. Loans to clients total $78 billion.

Merrill Comp Developments

In other news, Merrill Lynch is rolling out a new bonus program for its 15,000 financial advisors while eliminating an earlier one as part of its 2018 compensation plan. The Growth Grid Award is in, and the Strategic Growth Award is out.

With the new program, advisors adding new clients can get a boost of up to 2% in their cash compensation. But those who do not meet certain targets will see their cash bonus drop as much as 2%.

“Brokers are not happy with it,” said Danny Sarch, head of Leitner Sarch Consultants, in an interview. “If advisors were growing already … then Merrill Lynch would not feel it has to incent them and to threaten them with [both] a carrot and a stick.”

Other changes include a 1% shift from the yearly pay grid out of cash and into deferred compensation. In addition, advisors with less than $350,000 in yearly fees and commissions will be paid 34-35% next year; Merrill is getting rid of its earlier 20% and 25% grid rates.

“The design of our 2018 plan is intentional: to align incentives with growth behaviors, and to encourage performance with thresholds set at levels that can benefit every advisor,” explained Andy Sieg, head of Merrill Lynch Wealth Management, in a memo to advisors in early November.

According to Sarch, the 1% being moved out of cash and to deferred comp may make the overall comp plan “look the same,” but it means advisors can no longer spend that 1% now. “It’s disingenuous, one rep told me,” Sarch said, “since it’s being taken away” in 2018.

But other recruiters say Merrill is taking a practical approach. “Major wirehouses that have pulled back from recruiting are especially focused on increasing the productivity of their existing advisors,” said Elzweig. “This plan rewards behaviors that the firm feels will move them in that direction.”

As for the penalty, “The fact that it has a negative [cash bonus] brings everyone into play,” explained Andy Tasnady, head of Tasnady Associates, a consultancy that helps firms design compensation strategies, in an interview. “I think it is a bolder version of growth bonuses seen within the industry,” he said, adding that he had worked with Merrill on the 2018 comp plan. Merrill’s growth bonus “is tied directly to the grid, which is what advisors focus on the most.”

In the third quarter, average fees and commissions for Merrill’s Thundering Herd of 14,954 reps fell to $994,000 per advisor from $1.04 million in the prior quarter; veteran reps saw a smaller decline to $1.30 million from $1.35 million. The company said lower net interest income and training-program investments were to blame.

More Hoops

To get 1% more in cash next year, advisors must boost assets and liabilities by 5% over 2017 (with a $15 million maximum). They also are required to open five new accounts of households with over $250,000 in assets or add two households with more than $10 million to get a second 1% cash award.

If these two minimum hurdles are not met, advisors will see their cash grid drop by 2% in 2018. (Those meeting one of two requirements will see no change to their cash grid.) “You’ve got to check certain boxes tied to the growth target and new clients and must make two [bank] referrals,” Sarch said. “The best reps could get upset and … see independence as a better option.”

In the recruiter’s mind, Merrill Lynch “should never have a penalty” for those who are keeping their clients happy. “Why risk pissing them off?” he asked. “If I’m a typical rep building a business, managing money, doing financial plans and other stuff, this is a distraction,” Sarch added.

Plus, “Zero comp for family business can be a big issue for some advisors. It’s another way to take money out of my pocket,” he said. Specifically, Merrill Lynch says advisors will no longer be compensated for providing services to IRAs and similar accounts owned by family members.

For his part, though, Sieg was upbeat about the changes. “The plan was developed after dialogue with many advisors,” he said in the memo. “I’m confident you will find these new compensation features encouraging. This plan aims to reinforce the entrepreneurial spirit that animates each of you — boosting us collectively to achieve the kind of growth that is possible.”

For stable advisors who may not be spending lots of time growing their business, the new award “brings them into play,” Tasnady says. “This group can be difficult to motivate, and the [new bonus tied to a 5% target] could spur more of them to act” than, say, a bonus tied to a more aggressive growth target of 10-15%.

“Hitting this hurdle [for the 1-2% bonus] is reachable,” he explained. “It’s not that great. For a busy person who is not doing much prospecting, they are capable of doing it as they’ve [likely] done in past. Hopefully, this gets them to dust off their new-account-acquisition process and capability.”


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