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.
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.
WHAT IS THE BROKER PROTOCOL?
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.
IS THE PROTOCOL KAPUT?
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.”
COULD THE BREAKAWAY MOVEMENT SUFFER?
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.
WHAT ARE NEGATIVE EFFECTS FOR ADVISORS?
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.
HOW ELSE WILL IT CHANGE RECRUITING?
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.”
WHAT WILL REPLACE THE BROKER PROTOCOL?
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.