Broker Protocol Under Attack by Wall Street

Merrill Lynch recently claimed that its participation in the Protocol for Broker Recruiting (“broker protocol”) only applies to brokers who do not carry the “vice-president” or above title – which is functionally anyone worth recruiting.   Now Morgan Stanley and the U.S. wealth-management arm of Swiss bank UBS Group AG have also withdrawn from the broker protocol, a step that appears to substantially reduce the value of being a party to the protocol.

The broker protocol was established in 2004 by Merrill Lynch, UBS PaineWebber and Smith Barney.   Morgan Stanley and Wachovia Securities (now Wells Fargo Advisors), and the remaining major wirehouse firms followed in 2006.  The broker protocol was established to  minimize litigation and issues that emerged around privacy of client data in the broker recruitment process.  As a result,  brokers and advisers who were part of  firms participating in the broker protocol could leave without being sued if they followed certain rules, which are not complicated.  Basically, departing brokers are limited to taking names, addresses, phone numbers and email addresses of clients that they serviced while at a firm, and they are also restricted from telling clients about plans to move.

By exiting from or amending their participation in the recruiting pact, Merrill Lynch, UBS and Morgan Stanley will now be able to make it much harder for departing brokers to bring their clients with them.  Advisers will face temporary restraining orders upon leaving (preventing the adviser from contacting, and soliciting, his or her clients pending a negotiation) which was standard practice prior to the broker protocol, used as a delaying tactic in the process of on-boarding new clients, which also allowed the firm the adviser was departing from to solicit and move the clients to other advisers on their platform. Typically, that took the form of a temporary restraining order.

It has been observed that the broker protocol is losing its relevance as firms pull back from an expensive recruiting practice that involved offering brokers big upfront bonuses in the form of forgivable loans.  The loans were typically structured to keep an adviser from leaving for at least seven years.   The pull back is based on industry financial issues and new disclosure obligations regarding compensation packages of advisers to clients when advisers change firms, which was implemented by the Financial Industry Regulatory Authority recently.

In any event, the dissolution of the broker protocol may help the wirehouses maintain their adviser force in the short term, as without it, moving between firms will be harder for advisers.  But in the longer term, it may not matter much, as the recruitment process will reset to address the current environment; just expect more focus on privacy issues when moving clients, and higher legal bills.