Broker Protocol: The real story of its founding ― and its future

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In 2004, as General Counsel of Global Wealth Management at Merrill Lynch, I was part of a small group who originated the Protocol for Broker Recruiting. Since then, and until co-founder Morgan Stanley departed days ago, the protocol has enabled the efficient movement of advisors and clients between member firms. If other founders exit, which seems likely, the Protocol may be threatened with extinction. Its demise would be a sad day for financial advisors and clients alike, but is not likely to staunch the breakaway movement to independence.

The circumstances of the protocol’s origin aren’t widely known and are worth shining a light on. While it was driven by the big firms’ desire to avoid the enormous cost of lawyers pursuing and defending recruited financial advisors, there was a catalyst, without which I believe there would have been no pact.

Back in 2004, Wall Street found itself in the crosshairs of then N.Y. Attorney General Eliott Spitzer. Spitzer used New York’s criminal law, the Martin Act, as a club, and this was a time when corporations still feared that a criminal charge or conviction could threaten a firm’s very existence. It’s hard to overstate the concern the big firms had at that time. At Merrill, we were charged to identify and evaluate any business practices that might even remotely give rise to criminal liability.

A surprising one bubbled up from our review of the Global Wealth Management business, and it related to an obscure recruiting lawsuit in a federal court. If recollection serves, a judge in the case had threatened to use another criminal statute, the Economic Espionage Act, against a firm that had recruited an advisor, on the theory that they were complicit in assisting their recruit to violate the law by bringing “trade secrets,” in this case client names, to the hiring firm.

Each of the founding firms took their own view on liability, but if one saw any threat, due to the scale of recruiting, it was easy to understand it could be a significant problem. The threat of criminal liability was deemed real enough at the time to look to formulate a way around it, and thus the protocol was conceived.

Whether or not today’s regulators feel compelled to respond to the protocol’s potential demise, they should.

The regulators, and the SEC in particular, loved the protocol from the get-go because it removed significant impediments to the free movement of clients from one firm to another. It’s remarkable how difficult it can be for a client to move their account when the losing firm has legal protection to delay that transfer. Whether or not today’s regulators feel compelled to respond to the protocol’s potential demise, they should.

Internal discussions around joining the protocol were fascinating. Merrill Lynch knew they would save millions in legal fees by not having to defend and sue advisors and competitors. Nonetheless, it rapidly became apparent there were essentially two points of view: People were either “Free Traders” or “Protectionists.”

Simply put, Free Traders believed advisors would move or stay based on the strength of the brand, platform, products, services, culture and compensation. Advisors stayed with a firm because of those things, and because they felt part of a special community and had institutional pride.

Protectionists believed if you opened the gates, there would be an exodus and advisors would look to monetize their books at the first opportunity.

To some extent, both sides were right. It’s fair to say the protocol helped fuel the soaring advisor recruiting packages over those 13 intervening years and greased the skids for many advisors and clients to move. But not everyone looked to the exits, and it’s also fair to say the protocol helped make firms better in order to retain advisors and clients, and to recruit new ones. It’s impossible to refute that in a protectionist environment, advisors have less leverage and firms less incentive to look after them.

What wasn’t anticipated back in 2004, though, was the wirehouses becoming banks as a result of the financial crisis. One consequence of that has been the gradual “homogenization” of the big firms. Twenty years ago, wirehouses had markedly different personalities. Today, they seem, in many respects, indistinguishable from one another, particularly from the perspective of an advisor’s daily work environment. Today, the primary reason for a financial advisor to move from one to another is money.

So, what are the likely consequences if the protocol fades away?

Certainly, a new litigious stance by Morgan Stanley and other large firms will chill recruiting, but I suspect it will mostly reduce recruiting between the large firms which, since the crisis, was financially motivated anyway. I believe it will be less inhibiting to those who genuinely care about their clients’ best interests and seek independence. And overall, it will probably be temporary, as advisors and firms adapt to old rules in a new era.

Tactically, a lot has changed over the last 13 years. Top advisors have fewer clients and more ways of keeping contact with them, including texts and social media – none of which existed back then. It’s also a lot easier for clients to leave without being solicited.

Morgan Stanley has sent a firm message to its advisors about who owns their clients, and now will go into court and arbitration saying that client names are trade secrets, even though they weren’t for 13 years. And, of course, it won’t take long before Morgan Stanley is again on both sides of the recruiting battle and wasting money like before.

So the pendulum swings, and perhaps the free trade environment of the past 13 years will descend back into protectionism. Or maybe one or two firms will stay a beacon of the free market. It’s hard to forecast what exactly will happen, but one thing is for certain: Recruiting will not stop.

Maybe someone will even seek to invoke the Economic Espionage Act and firms will once again realize that we should make sure there is no confusion between client identities and trade secrets.

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Broker Protocol Recruiting Wirehouse advisors Wirehouses Going independent RIAs Rob Mooney Morgan Stanley Wealth Management Morgan Stanley Snowden Lane Partners Merrill Lynch