As the Broker Protocol Falters, Are You Ready to Make Your Move?

Morgan Stanley’s decision to back out of the Broker Protocol pact leaves its 15,000 financial advisors with an uncertain future. A wake-up call for an entire industry in which relatively unfettered movement of financial advisors between firms has been the norm, the news will cause other advisors to reevaluate their ties to large brokerage firms and push those ready for independence to act quickly.

Thirteen years ago, security brokerages signed the Broker Protocol, a pact agreeing not to sue each other when an advisor resigns from one firm and brings their clients with them to a new firm.  As long as advisors followed the protocol and only took an approved list of client information, they would have the freedom to reach out to their client base to protect those client relationships during the time of transition. By exiting the protocol, Morgan Stanley has made it more difficult for advisors considering a move to do so without fear of legal action being taken against them, or indeed, against the firm they wish to join.

Uncertainty in Wirehouses

Broker-dealers are increasingly concerned about their advisors leaving to become Registered Investment Advisors (RIA’s) (see “What’s an Aging Advisor to Do? Join an RIA”). Over the past several years, the large wirehouses have seen an increase in top advisor defections. Whether moving to smaller firms or going independent, those advisors were taking their top clients with them. While there has always been a certain amount of churn in the industry, the large firms have been losing the battle to attract top advisors to replace those that have left. From 2006-2016 the four top U.S. securities firms, Morgan Stanley, Bank of America Merrill Lynch, Wells Fargo and UBS Wealth Management America, have lost 10% of the industry’s market share and now account for just 36% of asset under management, according to research firm Cerulli Associates. By making it more difficult for advisors to leave, Morgan Stanley, for one, is hoping to stem that tide. Morgan Stanley’s move may lead other brokerage firms to the protocol exit door as well and that should be a wake-up call for advisors.

In accordance with the rules of the Broker Protocol, firms must give a ten-day notice of their intent to abandon the agreement. The timing of Morgan Stanley’s notice, however, was such that their withdrawal was not made public until six days after their formal letter was filed. Therefore, as Michael Thrasher of wealthmanagement.com notes, if Morgan Stanley’s 15,000 advisors received notice the same day as the public they may have only had four days to take action. The difference between four days and ten days of preparation to leave one firm for another is critical, according to Shirl Penney, president and CEO of Dynasty Financial Partners.

Why Consider Joining an RIA?

It can be argued that the RIA model is, in fact, better for the advisors and better for their clients. Cerulli Associates estimates that by 2018, RIA’s will control 28 percent of assets under management and 24.6 percent of overall adviser headcount.

Earlier this year broker-dealers began reducing the outsized cash incentives designed to lure advisors to move their books of business. While that may seem discouraging for those who waited too long to make a move, this trend has caused many to reexamine the advantages of becoming an RIA or joining an existing RIA. The initial attraction of a multimillion dollar up-front forgivable loan is not what it seems when compared to true ownership, a higher net revenue payout, and the long-term capital gain liquidity event associated with becoming an independent advisor. Clients benefit, too, because RIA’s are fiduciaries who always put their clients’ best interests before their own (a competitive advantage RIA’s emphasize in their marketing).

Proper Planning Ensures a Quick Transition

Advisors need to prepare, preserve their client base, and take control of their future. Morgan Stanley’s actions are likely to accelerate advisors to move to independence and with the right preparation and planning, and the right RIA and custodian to help you, it is possible to begin your move in a matter of days.

The most time-consuming part of the transition is gathering the information that the broker protocol allows advisors to take with them. As part of the preparation in advance of any potential move, advisors may wish to maintain a spreadsheet housing all of this transferable information. Even without a specific move date in mind, it is a good idea to continually update this document to be ready at a moment’s notice.

Todd Ingwersen is Managing Partner and CIO of The Harvest Group, a family-owned, independent Registered Investment Advisor (RIA). For more information on how the transition team at The Harvest Group can assist you in making a move, click here or call (978) 296-4800.


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