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Broker Protocol Helped Ex-Morgan Stanley Advisor Take $1B in Client Assets to New Firm

By Rita Raagas De Ramos December 15, 2017

Phil Shaffer, an ex-Morgan Stanley advisor, credits the Protocol for Broker Recruiting for the relative ease with which he set up his new practice, Halite Partners, and brought $1 billion in client assets -- with up to $3 billion more in transit -- to the six-month-old firm.

He expects advisors currently leaving Morgan Stanley to either have to jump through numerous hoops or, in a worst-case scenario, to be slapped with lawsuits and temporary restraining orders.

Had Shaffer and the five other ex-Morgan Stanley advisors who came along with him left after the wirehouse exited the broker protocol in November, Shaffer doubts the transition would have been as straightforward.

Indeed, on December 8 -- the same day advisor John Louis Fitzgerald submitted his resignation from Morgan Stanley to join Commonwealth Financial Network -- Morgan Stanley filed a request for a TRO and preliminary injunction before the U.S. District Court for the District of New Jersey. Morgan Stanley argued that in Fitzgerald’s employment agreement he “expressly agreed that he would not solicit any Morgan Stanley customer who he had serviced or learned of” while employed by the wirehouse for one year after leaving the firm. And yet, Morgan Stanley claims, Fitzgerald contacted customers “by both telephone and email within an hour or so of his resignation.” Morgan Stanley also filed an arbitration case before Finra’s arbitration forum.

On December 13, U.S. District Court Judge Renée Marie Bumb granted Morgan Stanley’s TRO request and scheduled a preliminary injunction hearing for January 9. The order forces Fitzgerald and other relevant parties to return within 24 hours documents and “computerized materials” removed at any time from Morgan Stanley. It also bars them from using the confidential information “in any way, including to solicit Morgan Stanley customers.”

But the order doesn’t stop them from returning phone calls, responding to emails or attending meetings requested by Morgan Stanley customers who know Fitzgerald from his days at Morgan Stanley. The caveat is if those customers transfer their accounts to Fitzgerald, the order says Morgan Stanley reserves the right to seek damages if prior solicitation led to the customer inquiry.

Shaffer spent 24 years at Morgan Stanley, having joined its predecessor Smith Barney – an original signatory to the broker protocol – in 1993. Until June, he was registered with Morgan Stanley and was the institutional consulting director of subsidiary Graystone Consulting, which he co-founded. He founded the Columbus, Ohio-based Halite in June, registered it with the SEC in July and submitted a joinder agreement to the broker protocol the same month.

“The protocol was very, very, very helpful to us. We followed the protocol. We submitted the list. We did not contact any clients in advance. We did not take any client information other than phone number and name,” says Shaffer. “We would have been subject to a temporary restraining order if we violated the protocol.”

As long as both firms are broker protocol signatories, the pact lets registered representatives who move from one firm to another take with them the following account information: client name, address, phone number, email address, and account title of clients they serviced while at the firm – and nothing more. It also lets registered representatives who comply with the agreement solicit customers they serviced while at their former firms – but only after they have joined their new firms.

The broker protocol let the clients of Shaffer and the other ex-Morgan Stanley advisors follow them to Halite. But a legacy agreement Shaffer had from his Smith Barney days restricted him from taking any clients if the relationship was shared with other advisors still at the firm and if it was an institutional account less than four years old. Shaffer says the shared relationships were only a small part of his practice at Morgan Stanley and “most of it was self-generated.”

Shaffer believes clients are better served and protected if their money is in firms that are broker protocol members. The potential chaos that could ensue with the parting of ways between an advisor and a non-broker protocol member firm would be harmful to clients, he says.

If a firm sues a departing advisor and wins a TRO, that would disrupt the trusted advisor’s relationship with a client “for days, weeks or even months,” he says.

“You’ll have a client who has a trusted advisor that they can’t talk to, and they’re handed some other advisor that they don’t know. That’s a big deal. That’s violating the client trust,” he says. “Clients are not happy when they are viewed as possessions of the firm.”

It also subjects the client to potential losses, he adds. “If the markets move substantially – and we know that most of the movement, whether up or down, comes in a handful of days – and the client can’t contact the trusted advisor, that is a problem.”

Shaffer believes Merrill Lynch made the right choice to stay in the broker protocol. “It will help them keep more advisors and clients.”

Phil Shaffer

He says he and the other ex-Morgan Stanley advisors left the wirehouse because they “wanted to be a part of a caring, positive and entrepreneurial culture that’s free of any conflicts of interest.” He says the “strong advancement of third-party technology, due diligence and research solutions” made the move to independence “a very attractive option.”

Having an ownership culture at his new firm is important to Shaffer, who believes sharing equity in his firm helped him attract talent that otherwise would not have been interested.

“I want everybody to roll in the same direction, I want everybody to be rewarded. That keeps us focused on our clients and focused on our game,” he says.

Halite’s business is more strongly focused on “providing institutional investment solutions” to multi-family offices while at the same time still catering to institutional clients such as endowments, foundations, pensions and health care centers.

Those were also the target clients of Graystone Consulting, where around two-thirds of the client assets were from institutions and the rest from multi-family offices, Shaffer says. That’s close to the current client asset mix at Halite, but the firm plans to bring that to a 50-50 split.

“There’s been a dearth of really solid firms serving successful multi-family offices,” Shaffer says. “You can have a firm that’s really good in investing but they’re not geared to help with family dynamics, governance, planning, wealth transfer, philanthropy. On the other side of the spectrum, you might find firms that can offer all that but they’re very pedestrian, mediocre and probably conflicted when it comes to investing.”

Aside from the “institutional pedigree” Halite brings to its multi-family office practice, Shaffer believes its clients will benefit from the access to investment funds its advisors gained from their history at Graystone Consulting.

While they were at Graystone, the institutional client accounts of Shaffer and the other ex-Morgan Stanley advisors ranged from $25 million to $700 million, averaging $125 million. Halite expects its multi-office family client accounts to average around $50 million, ranging from $25 million to $500 million.

“We literally have been able to get access to managers in funds that are just not typically available to successful families,” he says.

Complementing its strategy of organic growth, Halite plans to be an active acquirer of RIA practices – one or two per year – in various cities where wealth is concentrated.