Published March 21, 2018
Up until five months ago, wirehouse financial advisors enjoyed a period spanning fourteen years under the “cease fire” protection of the Broker Protocol where they could transition their practices to virtually every other channel, including other wirehouses, independent broker-dealers, RIAs and RIA roll-up firms, without being sued. Granted there were rules to follow, but the freedom to select one’s future home and follow what was best for their clients was attainable across the industry. While there are still 1,734 protocol members in place at the time of this writing, everyone is anxious to see how firms like Merrill Lynch, Wells Fargo and the various regionals ultimately follow the footsteps of Morgan Stanley, UBS and Citigroup.
There exists a dichotomy in our industry of protocol versus non-protocol firms where developments in the recruiting world continue to unfold in predictable and unpredictable ways. For example, it appears that while Morgan & UBS have initiated legal action against departing brokers in the form of TROs, they have not yet resorted to actually suing other protocol wirehouses and advisory firms. Reducing legal costs was one of the major factors that led to the original Protocol in the first place. Further, while both firms have followed through on their threat of legal action against brokers, the results have been mixed at best, with various courts siding with the departing brokers.
Advisors are Boldly Breaking into Other Models
What is interesting to note in the current environment is that a phenomenon is taking shape, where while some brokers may have been dissuaded by the difficulty and uncertainty in departing their non-protocol firm, others have been clearly emboldened. Not only have I confirmed this through numerous direct conversations with advisors, and anecdotally in the press, but also with professional third party consultants across the country, including Jeff Nash, CEO of Bridgemark Strategies. In our recent conversation, Jeff notes, “There is a clear uptick in advisors coming from wirehouses. Exiting the protocol shocked the advisors and effectively temporarily froze them in place. As stories continue to come out about advisors winning TROs, advisors are becoming increasingly emboldened. Creating virtual walls around a broker-dealer to attempt to keep their advisors from leaving often has the opposite effect and I expect to continue to see more advisors from former protocol firms looking to leave.”
With Morgan and UBS exiting the Protocol, an interesting psychological dynamic is playing out from my perspective. When someone is told they absolutely can’t do something, such endeavors become not only more attractive, but the focus of their attention. When the powerful psychology of the forbidden fruit kicks in, that inexplicable instinct and unattainable urge to seek out what you can’t have drives us forward! For some, closing the gates and the fear of litigious reprisals is enough to make one fall back to their comfort zone of complacency in the status quo, but the opposite is playing out with the experts and advisors I’m talking to.
The Impact on Recruiting Future Advisors
I believe many others may share my view: that exiting the Broker Protocol was a shortsighted tactical error that Morgan, UBS and Citi will come to regret. The business world will find creative ways to knockdown such artificial barriers and circumvent protectionist measures designed to restrict the free flow of trade. They are simply putting themselves in a “catch 22,” where they not only effectively shut down their recruiting efforts (because no advisor wants to join a firm that they can never leave), but at the same time they have also successfully antagonized their advisors into an adversarial relationship, thus putting their main source of revenue at risk. To that point, in February, within just a few days on instituting a firm-wide mandate requiring advisors to sign a one-year non-solicit agreement tied to 2018 bonuses, UBS backed-off in the media after a substantial backlash amongst their advisors. Nevertheless, UBS’s protectionist efforts appear to be in full swing behind the scenes, as word has it that not only are they trying to get advisors to join or form teams (making it harder for a single producer to leave), but in 2019 they will indeed tie their advisor’s deferred comp to a strongly worded, anti-competitive, non-solicitation agreement!
In closing, it will be interesting to see how the industry recruiting data plays out in 2018. My thought is that IBDs, RIAs and RIA roll-ups will continue to see increased activity from consolidations, disruptions and more importantly, new conversations with wirehouse advisors who would otherwise not be in play, were it not for them being told what they cannot do! Our job as recruiters in the independent channel is to remind them that their clients are their personal relationships, not property of the wires. Furthermore, advisors need to understand that a non-protocol transition is worth the risk in the long run. So long as they follow their employment and non-solicitation agreements to the letter, there will be no legal action taken against them. Jeff Nash comments: “In this hyperconnected world we live in today, their clients will seek them out and their practices should be reconstituted within a year. The vast majority of clients have their accounts at a wirehouse because that is where their advisor happens to work, not because the client says they need to have their account at a wirehouse firm.” From my perspective, scenarios where clients are negatively impacted and stuck in the middle will probably be a focal point for the regulators. Finally, as independents, advisors and their clients will be beneficiaries of the fiduciary standard, supporting the highest quality advice in the industry. Surely others will continue to follow!