Welcome to the Post-Protocol Era


Almost exactly one year removed from the “Department of Labor’s FAQ Day” on October 27, 2016, here we are at another one of those, “you’ll remember where you were” moments.

October 30, 2017, the day Morgan Stanley said it was leaving the Protocol for Advisor Recruiting.

What does it all mean? Well, it clearly and definitively ushers in a new era in recruiting. Protocol has been dying a death by a thousand cuts.

Advisor Protocol was birthed in 2004 as an agreement between UBS, Merrill Lynch and Smith Barney as a sort of Geneva Convention to bring rules of engagement to the blood sport of recruiting.

The Protocol worked as designed for about 5 or 6 years, lowering legal costs and keeping clients removed from the ugly tug-of-war (for the most part), but as hundreds of other legal entities signed onto the Protocol, it started to drift away from its intended purpose. More and more small broker-dealers and registered investment advisors were signing on for the sole intent of being able to feed off the original signatories’ advisors.

HighTower, founded in 2007, upended the traditional recruiting war by providing an entirely new “hybrid” channel; soon enough the term “breakaway broker” became ubiquitous in the wealth management nomenclature.  Yes, of course, HighTower signed the Protocol. Suddenly the wirehouses were facing an adversary who literally had nothing to lose. The Protocol was designed as guard rails for recruiting’s two-way street.  HighTower and mega roll-up firm Focus Financial Partners represented one-way streets.  Breakaway brokers were going TO these new-channel firms, never FROM.

Compliance consulting firms like MarketCounsel created a cottage industry of structuring protocol-compliant RIAs for these breakaway advisors to land in when they jumped ship.  Now with 1,600-member entities, Protocol has become a Get-Out-Of-Jail Free card for wirehouse advisors looking to join an RIA or start their own.

“Over time the Protocol has become replete with opportunities for gamesmanship and loopholes: firms have opportunistically joined the Protocol to make a strategic hire and then dropped out,” Morgan Stanley said in announcing its decision on Monday.

Frankly I’m surprised that the original signatories (now including Morgan Stanley) had stayed in the protocol this long. And with Morgan Stanley being the first mover, I am sure that all others are watching and calculating whether they are better off without the advisor protocol (if they weren’t already on the same path).

What is the near-term effect on recruiting? To quote a branch manager friend of mine, “This definitely slows traffic in and out of Morgan Stanley.” The long-term impact depends on whether the other firms are also willing to slow their traffic and acknowledge there’s more to gain by staying out of the recruiting wars. If you’re wondering whether that’s likely, look how quickly they all moved to cut recruiting deals after the DOL FAQ guidance last year.

Free Agency may have taken a body blow today, but you can rest assured that top advisors and teams will always have BIG offers being shown to them. And just like pre-2004, big advisors are always free to work wherever they want to work, and bring their clients with them. Advisors leave Edward Jones, J.P. Morgan’s private bank, Goldman Sachs (Goldman Sachs Wealth Rainmaker Frank Ghali Resigns, Forms RIA), and other firms all the time without Protocol protections.

Will advisors leaving or going to Morgan Stanley today need a bit more legal advice before moving? Yes. Will some firms have to set aside extra monies to cover legal costs when hiring advisors from Morgan Stanley? Also, likely.

What everyone will need to figure out is how an advisor/team can leave their current firm and have their clients DECIDE to follow them.

Welcome to the post-Protocol era. Free Agency has a new look, but the Free Market is alive and well.