Break Away

Ad­vi­sors such as Greg Her­sch have long found pro­fes­sional ful­fill­ment by leav­ing wire­houses to start their own firms. But with the Bro­ker Pro­to­col col­laps­ing, will they find that path cut off?

Financial Planning - - CONTENT - By An­drew Welsch

Ad­vi­sors have long found pro­fes­sional ful­fill­ment by leav­ing wire­houses to start their own firms. But with the Bro­ker Pro­to­col col­laps­ing, will they find that path cut off?

After more than 15 years work­ing at big bro­ker­age firms, ad­vi­sor Jim Den­holm de­cided he’d had enough. Den­holm was con­cerned about what he saw as overem­pha­sis on cross sell­ing, and he wanted to have bet­ter tech­nol­ogy when ser­vic­ing clients. So last June, the for­mer Wells Fargo ad­vi­sor, who over­saw about $200 mil­lion in client as­sets, left to form his own RIA, Iron­bridge Pri­vate Wealth, in Austin, Texas.

He spent his first day calling clients un­til 8 p.m., reach­ing all of them within the first two days.

“It was like the gun at the start­ing line had fired, and I was the first step into a 100-mile run,” Den­holm says. “That’s how I feel. This is a long-term game that we are play­ing.”

But the rules of the game are chang­ing. For over a decade, wire­house ad­vi­sors have jumped from large bro­ker­ages to smaller in­de­pen­dent firms. Clients have of­ten fol­lowed suit. In 2017 alone, em­ployee ad­vi­sors man­ag­ing nearly $40 bil­lion moved to RIAS or IBDS, ac­cord­ing to an analysis of hir­ing an­nounce­ments by Fi­nan­cial Plan­ning.

All this move­ment was made pos­si­ble in part by the Bro­ker Pro­to­col, a 2004 ac­cord that per­mits ad­vi­sors to take ba­sic client con­tact in­for­ma­tion with them when switch­ing firms.

When Den­holm wanted to ex­plain to his clients why they would be bet­ter-served by his new RIA, it helped, of course, to have a list of their phone num­bers and email ad­dresses.

But Mor­gan Stan­ley and UBS’ re­cent de­par­ture from the Bro­ker Pro­to­col has other firms also eye­ing the exit, cast­ing a shadow over the fu­ture of the in­dus­try­wide pact. Could the pro­to­col’s demise cut off the flow of tal­ent and as­sets from the wire­house to in­de­pen­dent chan­nel? “It’s clearly an im­ped­i­ment,” says Rob Mooney, CEO of Snow­den Lane Part­ners and a for­mer Mer­rill Lynch ex­ec­u­tive.

The fu­ture of the break­away ad­vi­sor move­ment may come down to a tug of war be­tween a de­sire for greater in­de­pen­dence and the fear of be­com­ing a le­gal tar­get.

“We’ll see what hap­pens with how the pro­to­col plays out,” says Greg Her­sch, a for­mer UBS bro­ker who opened his own RIA, Florence Cap­i­tal Ad­vi­sors of New York, in 2015.

“But I think it stands to rea­son that if the large wire­houses are ex­it­ing it, then they will be more ag­gres­sive in de­fend­ing their client lists.”


Ex-em­ploy­ers could file law­suits to block de­part­ing ad­vi­sors from con­tact­ing clients. Such lit­i­ga­tion was com­mon in the pre-pro­to­col world. And 2018 will test just how big a road­block non-pro­to­col firms can put in front of po­ten­tial break­away bro­kers.

“In ef­fect, UBS and Mor­gan Stan­ley are step­ping up their fo­cus on fi­nan­cial ad­vi­sor re­ten­tion while si­mul­ta­ne­ously adopt­ing a more pro­tec­tive pos­ture,” the Ever­core an­a­lysts John Pan­cari, Sa­muel Ross and Rahul Patil wrote in a Novem­ber re­search re­port. “Con­sis­tent with th­ese ac­tions, such firms could also step up en­force­ment of non-so­lic­i­ta­tion agree­ments, thereby pre­vent­ing bro­kers that have changed firms from con­tact­ing clients from the prior firm.”

Be­tween them, Mor­gan Stan­ley and UBS have more than 22,000 ad­vi­sors man­ag­ing about $3 tril­lion in client as­sets. This gives their pro­to­col de­ci­sion enor­mous weight within the in­dus­try. Cit­i­group, which has about 1,000 ad­vi­sors, said it too would exit the pro­to­col early this year.

For its part, Mor­gan Stan­ley “will con­tinue to ex­pect de­part­ing ad­vi­sors to honor their non-so­lic­i­ta­tion obli­ga­tion after we exit the pro­to­col,”

a spokes­woman says.

In De­cem­ber, the firm fol­lowed through on that prom­ise, fil­ing a law­suit against John Fitzger­ald less than three days after the ad­vi­sor, who is based in Vineland, New Jer­sey, left to form a new prac­tice with the in­de­pen­dent bro­ker-dealer Com­mon­wealth Fi­nan­cial Net­work.

The firm ar­gued that Fitzger­ald had signed a one-year non-so­lic­i­ta­tion agree­ment and that Mor­gan Stan­ley’s re­sources and train­ing were ma­te­rial fac­tors in his abil­ity to at­tract clients.

“His ex­press obli­ga­tions not­with­stand­ing, Fitzger­ald was con­tact­ing Mor­gan Stan­ley’s cus­tomers by both tele­phone and email within an hour or so of his res­ig­na­tion,” ac­cord­ing to the firm’s law­suit.

A judge granted the firm a tem­po­rary re­strain­ing or­der, but with the caveat that Fitzger­ald could re­ply to clients if they con­tact him.

Fitzger­ald and his at­tor­ney did not re­spond to re­quests for com­ment.


Though the mer­its of the case are dis­tinct (Com­mon­wealth is not a pro­to­col mem­ber, for in­stance), it could yet prove to be a har­bin­ger of things to come.

“That asym­me­try is what the wire­houses are count­ing on,” says El­liot Weiss­bluth, CEO of Hightower Ad­vi­sors, which has helped a num­ber of large wire­house teams go in­de­pen­dent. “I think they are as­sum­ing that an in­di­vid­ual will not want to face off against them.”

But the wire­houses that count on that strat­egy may find them­selves mis­taken, Weiss­bluth says: In­di­vid­u­als take on big in­sti­tu­tions all the time.


Even when pro­to­col pro­tec­tions are in place, there’s a fren­zied race that oc­curs when­ever an ad­vi­sor leaves a firm: Who will be the first to reach out to the clients?

In 2016, it took only 45 min­utes after Sarah Keys’ res­ig­na­tion be­fore her ex-em­ployer, Mer­rill Lynch, started send­ing emails to her clients. Keys and her three part­ners left the wire­house to launch Car­dan Cap­i­tal Part­ners in Den­ver, and to­day their team over­sees ap­prox­i­mately $700 mil­lion.

Take that horse race and, now with the non-pro­to­col firms, add the prospect of a David-ver­sus-go­liath court bat­tle to the mix. Will the risk of a le­gal bat­tle de­ter some wire­house ad­vi­sors from ever leav­ing?

It could, but that risk may also spur some ad­vi­sors to seek al­lies, says Phil Shaf­fer, a for­mer Mor­gan Stan­ley man­ag­ing di­rec­tor who opened an in­de­pen­dent firm, Halite Part­ners, last June.

“The big­ger teams might look at a two-step process,” he says. “They might look for firms that have cap­i­tal, that can help them in a le­gal bat­tle, and then some years later, they’ll take the next step and go fully in­de­pen­dent.”

Mean­while, smaller teams with less than $200 mil­lion in AUM could be driven to join ex­ist­ing RIAS in or­der to mit­i­gate lit­i­ga­tion risk, ac­cord­ing to Shirl Pen­ney, CEO of Dy­nasty Fi­nan­cial Part­ners. “You may see more sub­ac­qui­si­tions or tuck-ins. Those firms are well funded and can sup­port a move,” he says.

Shaf­fer, how­ever, adds an im­por­tant wrin­kle: By ex­it­ing the Bro­ker Pro­to­col, UBS and Mor­gan Stan­ley have di­min­ished the value of their

ad­vi­sors’ prac­tices be­cause po­ten­tial le­gal ex­penses will have to be baked into the cost of mak­ing a ca­reer change. In other words, re­cruit­ing deals of­fered by hir­ing firms could be smaller go­ing for­ward.

It may also be nec­es­sary to more closely scru­ti­nize an ad­vi­sor’s client list. “On any tran­si­tion, peo­ple will have to get gran­u­lar,” says Snow­den Lane’s Mooney. After a close read­ing of any non-com­pete or non-so­lic­i­ta­tion lan­guage, then “it’s more of a ques­tion of client size than book size. Is it 50 re­la­tion­ships? Or 100? How are you in con­tact with those clients?”

There’s also unan­swered ques­tions as to how much fa­vor the courts will show the firm.

Can an ad­vi­sor who joined Mor­gan Stan­ley un­der the pro­to­col take that same client list with him when leav­ing the firm now?


In­dus­try in­sid­ers say ad­vi­sors con­sid­er­ing a ca­reer change are wait­ing to see who goes first and tests the le­gal wa­ters. But which ad­vi­sor wants to be that guinea pig?

Yet, even if all the big bank-owned bro­ker­ages quit the pro­to­col, the rea­sons ad­vi­sors have been leav­ing for smaller in­de­pen­dent firms have not changed. Keys and her part­ners, for one, would prob­a­bly have been un­de­terred by a lack of pro­to­col.

“I imag­ine we still would have done it,” says one of Keys’ part­ners, Ross Fox. “The peo­ple we talked to be­fore we left all said that they wish they had done it sooner.”

Her­sch, the for­mer UBS ad­vi­sor, says build­ing his own firm has been among the hard­est things he’s ever done — and he would do it again.

“I can say life might have been a lit­tle eas­ier at a bank, but I’ve never been more sat­is­fied in my ca­reer than I am now,” he says.

Con­cerns about cor­po­rate cul­ture and a de­sire for greater free­dom are among the top mo­ti­va­tions ad­vi­sors cite when mak­ing ca­reer changes, ac­cord­ing to Cerulli As­so­ciates.

Be­com­ing a non-pro­to­col firm does noth­ing to mit­i­gate dis­con­tent among the rank-and-file, in­dus­try in­sid­ers say.

“I think the bank­ing cul­ture is very dif­fer­ent than the in­de­pen­dent, bou­tique cul­tures,” Mooney says. “It’s in­her­ently more bu­reau­cratic. It’s more process-driven and less peo­ple-cen­tric.”

In ad­di­tion, the world ad­vi­sors op­er­ate in to­day is very dif­fer­ent than that of 2004, when UBS, Mer­rill Lynch and Smith Barney were the orig­i­nal sig­na­to­ries of the pro­to­col. There are cer­tain tac­ti­cal ad­van­tages ad­vi­sors have that they did not be­fore.

“Bro­ker Pro­to­col was a sys­tem de­signed be­fore so­cial me­dia, when mail­ing a let­ter or mak­ing a phone call was the only way to make con­tact with a client,” Den­holm notes.

Good ad­vi­sors, he adds, are en­tre­pre­neur­ial by na­ture. They’ll find a way to over­come hur­dles, in­clud­ing the lack of pro­to­col pro­tec­tions.

Jim Gold, a for­mer man­ager at Mor­gan Stan­ley and cur­rent CEO of the in­de­pen­dent firm Stew­ard Part­ners, agrees. “Face­book, Google, Twit­ter — all are a much big­ger pres­ence to­day,” he says. “And even find­ing a phone num­ber is eas­ier.”


Stew­ard Part­ners, which is af­fil­i­ated with Ray­mond James, has been an ac­tive re­cruiter of wire­house tal­ent. Since its found­ing in 2013, the in­de­pen­dent firm has re­cruited more than 70 ad­vi­sors man­ag­ing about $8 bil­lion in client as­sets, ac­cord­ing to the firm.

Gold doubts the ex­o­dus will sud­denly end. He ex­pects ad­vi­sors to con­tinue to find ways to move even if the pro­to­col col­lapses.

The out­flow of wire­house ad­vi­sors to in­de­pen­dent RIA firms has “gone from a trickle, to a stream, to a rag­ing river,” Gold says. “You can’t shut that off.” It may be pos­si­ble to dam the river, he adds. But, over time, wa­ter flows down­hill.

Jim Den­holm, who started his own RIA, Iron Bridge Pri­vate Wealth, pre­dicts ad­vi­sors will seek in­de­pen­dence even if their firms leave the Bro­ker Pro­to­col.

Jim Den­holm took clients’ phone num­bers and email ad­dresses when he left Wells Fargo to form his own RIA in Austin, Texas. Now that wire­houses are leav­ing the Bro­ker Pro­to­col, ad­vi­sors from those firms might find them­selves in court if they try to con­tact clients at their for­mer firm.

Greg Her­sch says build­ing his own firm wasn’t easy, but it was worth the ef­fort. “I’ve never been more sat­is­fied in my ca­reer,” he says.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.