Will threatened Broker Protocol upend advisors' career plans?

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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.”

Advisors on the move: 28 of the biggest, most recent jumps
Wells Fargo, Merrill Lynch, UBS and Morgan Stanley all lost talent in 2017.

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 sub-acquisitions 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.

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Broker Protocol Going independent RIAs Recruiting Wirehouse advisors Wirehouses Morgan Stanley UBS Dynasty Financial Partners Hightower