What’s Next for the Bro­ker Pro­to­col?

An­swers to top ques­tions and con­cerns about the fu­ture of an in­dus­try ac­cord that gov­erns bro­kers when they switch firms.

Financial Planning - - CONTENT - By An­drew Welsch

Here are an­swers to top ques­tions and con­cerns about the fu­ture of an in­dus­try ac­cord that gov­erns bro­kers when they switch firms.

With Mor­gan Stan­ley and UBS out of the Bro­ker Pro­to­col, ques­tions are swirling around the fu­ture of the ac­cord and its im­pact on re­cruit­ing. Are ad­vi­sor moves fin­ished? Will break­aways be snuffed out? Should FINRA get in­volved? reached out to top in­dus­try in­sid­ers and ex­perts to find out what’s at stake for ad­vi­sors.


It’s an in­dus­try trade agree­ment cre­ated in 2004 by Mer­rill Lynch, Smith Barney and UBS that per­mits bro­kers to take ba­sic client con­tact in­for­ma­tion with them when they switch firms.

The pro­to­col re­duced lit­i­ga­tion be­tween firms, which used to sue each other to block bro­kers from tak­ing clients (and their as­sets) when switch­ing em­ploy­ers.

Ap­prox­i­mately 1,700 firms have be­come sig­na­to­ries. SIFMA, the in­dus­try trade group, used to main­tain a list of pro­to­col firms, but it trans­ferred re­spon­si­bil­i­ties for this to the law firm Bressler, Amery & Ross in 2015. Bressler sends out a weekly up­date on who has joined and ex­ited the ac­cord.

Mor­gan Stan­ley an­nounced its in­ten­tion to leave the pro­to­col in late Oc­to­ber, and UBS fol­lowed three weeks later. Both have dras­ti­cally cut re­cruit­ing ef­forts re­cently.


This ques­tion leaves in­dus­try ob­servers di­vided. One camp says the agree­ment can’t sur­vive with­out the sup­port of the big four wire­houses, which col­lec­tively have more than 50,000 ad­vi­sors (UBS and Mor­gan Stan­ley rep­re­sent about 22,000 bro­kers). Stifel CEO Ron Kruszewski pre­dicted that the ac­cord would un­ravel in the wake of Mor­gan Stan­ley’s exit.

But a sec­ond school of thought sug­gests that some firms, par­tic­u­larly the grow­ing re­gional bro­ker­ages, will stick with the pro­to­col in or­der to dif­fer­en­ti­ate them­selves from their wire­house com­peti­tors.

“I think that as far as ri­val firms are con­cerned, they’re pretty ex­cited to use this as a re­cruit­ing op­por­tu­nity,” says Mark Elzweig, an ex­ec­u­tive re­cruiter whose firm spe­cial­izes in ad­vi­sors.

Pro­to­col firms could tout their cul­ture and re­spect for ad­vi­sor choice when at­tempt­ing to lure tal­ent away from ri­val non-pro­to­col firms, he says.

Ray­mond James, for in­stance, came out in sup­port of the ac­cord, cit­ing ad­vi­sor and client choice.

In ad­di­tion, firms that choose to stay in the pro­to­col will not have to worry about non-pro­to­col firms poach­ing their tal­ent be­cause ad­vi­sors will be re­luc­tant to join a firm that won’t let them am­i­ca­bly leave at a later date, in­sid­ers say.

“I think ad­vi­sors want to know if they move to a firm that they are not chained to it for life, says at­tor­ney Nancy Hen­drick­son, a se­cu­ri­ties lit­i­ga­tion part­ner at the Chicago law firm Kauf­man Dolowich Voluck. “They want to know that should they later choose to leave a firm, they can do so am­i­ca­bly.”


For years, there’s been a steady de­par­ture of top wire­house ad­vi­sors to start their own RIAS, of­ten with the help of such firms as Dy­nasty Fi­nan­cial Part­ners and Hightower Ad­vi­sors, which as­sist break­aways.

“When ad­vi­sors cir­cu­lated pri­mar­ily among the wire­houses, it was eas­ier to be part of the pro­to­col, be­cause what you lost, you also got back,” says Rob Mooney, a for­mer Mer­rill Lynch ex­ec­u­tive who is now CEO of Snow­den Lane Part­ners.

Wire­houses are leav­ing the pro­to­col pri­mar­ily be­cause of the growth of the break­away move­ment, Mooney says. “It’s a val­i­da­tion of the fact that the best ad­vi­sors are seek­ing in­de­pen­dence,” he says.

Leav­ing the pro­to­col may help a firm to dis­cour­age bro­kers from go­ing in­de­pen­dent. But be­ing a non-pro­to­col firm doesn’t change the rea­sons that break­away bro­kers want to leave in the first place. In other words, it’s all stick and no car­rot.

“The folks who were go­ing in­de­pen­dent have a strong in­de­pen­dent streak, a strong en­tre­pre­neur­ial spirit,” Mooney says. Leav­ing the pro­to­col “will make moves

more dif­fi­cult, but it won’t com­pletely stem it. Wa­ter finds its own equi­lib­rium.”

Snow­den Lane, which has re­cruited sev­eral wire­house teams, is not plan­ning to leave the pro­to­col, Mooney adds.


Le­gal costs as­so­ci­ated with mak­ing a ca­reer change will prob­a­bly rise and the size of re­cruit­ing bonuses may shrink, ex­perts say.

“When [re­cruit­ing firms] think about the type of deal they would need to hire ad­vi­sor tal­ent, then they need to fac­tor in the le­gal cost,” says Phil Shaf­fer, a for­mer man­ag­ing di­rec­tor at Mor­gan Stan­ley who founded Halite Part­ners in 2017.

“The ac­quir­ing firm will re­duce some of the risk by say­ing, ‘We’ll pay you as you bring those as­sets over,’ ver­sus ‘We’ll pay you X up­front,’ ” he says.

Even if a re­cruit­ing deal of­fered by a non-pro­to­col firm is en­tic­ing, ad­vi­sors may want to think twice.

“I think fit and money are much big­ger is­sues for the ad­vi­sor than whether the firm is in the pro­to­col. But if you were com­par­ing two firms that are ba­si­cally the same and only one was a pro­to­col firm, then I’d rec­om­mend go­ing to the pro­to­col firm be­cause you can take your clients with you, should you leave at a later date,” says Ross In­telisano, a found­ing part­ner at the law firm Rich, In­telisano & Katz. “No one knows how th­ese firms will use their new­found fire­power.”

Ad­vi­sors are also ad­vised to make sure that their exit from a non-pro­to­col firm is con­ducted in a pro­fes­sional man­ner.

In the past, when firms have sued de­part­ing ad­vi­sors for breach­ing the Bro­ker Pro­to­col’s rules, they’ve sub­poe­naed com­mu­ni­ca­tions. A 2017 le­gal bat­tle pit­ting a break­away RIA in Con­necti­cut against UBS re­sulted in dozens of text and email mes­sages be­tween ad­vi­sors and clients be­ing made pub­lic.


For ad­vi­sory firms that have left or will leave the pro­to­col, in­sid­ers pre­dict hir­ing ef­forts will suf­fer be­cause ad­vi­sors will not want to join a non-pro­to­col firm for fear they could never leave.

Shirl Pen­ney, CEO of Dy­nasty Fi­nan­cial Part­ners, says: “One of the nu­ances that peo­ple may be miss­ing is that when some­one ex­its the pro­to­col, it does two things. First, it makes it more costly for some­one to make a move. But when a firm leaves the pro­to­col, it makes it harder for them to re­cruit ad­vi­sors.”


It’s not clear, but ev­ery­one in­ter­viewed for this ar­ti­cle lamented that there might not be a client-friendly sys­tem to re­place it.

“I scratch my head on why we don’t have some­thing more client-cen­tric here,” Shaf­fer says. He adds that Halite Part­ners will re­main in the pro­to­col.

Mean­while, calls are mount­ing for reg­u­la­tors to get in­volved. “I don’t think the pro­to­col was en­acted with the clients fore­most in mind, but it prob­a­bly served them more than any­one when com­pared to the pre­vi­ous regime,” says Hen­drick­son, the se­cu­ri­ties lit­i­ga­tion spe­cial­ist. If the pro­to­col col­lapses, it will leave a void along with many unan­swered ques­tions. “Some­one should step in, and the log­i­cal ac­tor would be the SEC or FINRA, ” she says.

In a worst-case sce­nario, clients could be left in the lurch as ad­vi­sors and firms file tem­po­rary re­strain­ing or­ders against one an­other in court, ar­gu­ing over whom the client be­longs to.

“We ought not to be en­cum­ber­ing clients in the midst of lit­i­ga­tion by de­ter­min­ing client names are trade se­crets,” Mooney says.

But whether reg­u­la­tors would get in­volved is un­known. At the mo­ment, the fo­cus in Wash­ing­ton is on dereg­u­la­tion — not the op­po­site.

If the pro­to­col col­lapses, “some­one should step in,” says Nancy Hen­rick­son, a se­cu­ri­ties lit­i­ga­tion spe­cial­ist. FINRA and the SEC are can­di­dates.

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