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Ex-Wirehouse Advisor Says Firms Leaving Broker Protocol is an Affront to Fair Play

By Rita Raagas De Ramos February 9, 2018

Advisor Bryan Sullivan -- who spent 17 years working as an advisor at large financial institutions before venturing out on his own -- believes the exit of firms from the Protocol for Broker Recruiting is "a big step backwards in an era of fair play."

Sullivan, the San Luis Obispo, Calif.-based CEO and co-founder of WealthSource Partners, believes advisors should take ownership of their client accounts -- and not the firms -- assuming the clients do indeed want to follow their advisor to another firm.

Morgan Stanley was the first among the wirehouses to exit the broker protocol in November, then UBS followed later in the month. Citigroup left the pact in January.

Sullivan spent 17 years working as an advisor at large financial institutions -- namely UBS, Merrill Lynch, and Edward Jones -- before breaking away from the broker-dealer advisor model to set up Vellum Financial in 2009, which merged with Avant-Garde Advisors to form WealthSource Partners in January 2016. He says he wanted to veer away from the "complexity" and "opacity" of large broker-dealer firms. His goal was to establish an RIA that is simple, transparent and client-centric.

WealthSource Partners joined the broker protocol on February 12, 2016, shortly after the firm was launched.

Bryan Sullivan

"In my opinion, all firms -- especially the large wirehouse firms -- understand that clients do business with their advisor and not the firm," Sullivan says. "The old method of move, get sued and settle is truly a stain on the culture of the industry."

FA-IQ reached out to Morgan Stanley, UBS and Citigroup for this article. Morgan Stanley and UBS declined to comment. A Citigroup spokesman replied by reiterating to FA-IQ that the firm exited the broker protocol to enable it to "continue to invest" in its "growing team of advisors."

Morgan Stanley has been pursuing TRO complaints against its former advisors since it exited the broker protocol in November. The wirehouse has argued -- in some form or another -- that client retention is crucial to the firm’s success. In the latest known TRO motion, filed on January 22 against former registered representative Daniel Abel -- and granted by a district court judge on January 23 -- the wirehouse’s complaint says it spends considerable time, money and resources to identify, service and maintain clients; to secure personal and financial information; and to generate new leads for prospective clients. The complaint says a critical component of its continued success is building and retaining relationships with clients, particularly high-net worth individuals.

Sullivan believes that going back to the period before the broker protocol was created would be detrimental to the industry, when there were contentious litigation relating to advisor movements.

The broker protocol was created in 2004 to help cut down the number of lawsuits and arbitration cases filed by broker-dealers because of advisors changing firms.

The pact lets registered representatives who move from one firm to another -- as long as both firms are signatories to the broker protocol -- take the following account information: client name, address, phone number, email address and account title of the clients they serviced while at the firm -- and nothing more.

The pact 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.

Before the broker protocol was created, the number of lawsuits and arbitration cases filed were "excessive" and the poaching of advisors from companies was "rampant," says Bill Singer, a lawyer who is of counsel at Gusrae Kaplan Nusbaum.

Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group, believes the broker protocol "serves as a covenant not to sue" and "overrides" non-solicitation agreements. However, he says the protocol could be set aside if any of the rules weren’t followed correctly, if there was any misrepresentation to clients, or if the departing brokers solicited clients they weren’t responsible for bringing to their old firm.

Ron Edde, San Diego, Calif.-based president and CEO of recruitment firm Millennium Career Advisors, says that based on his conversations with advisory firms, he expects more firms to pull out of the broker protocol. In 2017, 26 firms exited the agreement, and so far this year, four firms have pulled out, according to information from Carlile, Patchen & Murphy.

WealthSource Partners’ Sullivan says "it will be sad to see us revert back to those times" before the broker protocol was created.

"Morgan Stanley seems to be serious about their position though. It will be interesting to watch how this plays out," he says.

When asked to comment about the latest TRO granted against Abel as well as the previous TROs granted against three other advisors, a spokeswoman for Morgan Stanley replied: "Morgan Stanley expects all former employees to comply with their legal and contractual obligations to the firm."

Sullivan says WealthSource Partners’ "ability to recruit effectively from firms like Morgan Stanley and UBS" is impacted by their exit from the broker protocol, which is "obviously their point."

He adds: "There’s really no protection from litigation from those firms."

WealthSource Partners is aiming to grow its client assets tenfold to $5 billion in 2021 from $540 million at the end of 2016, Sullivan says. Much of that growth projection is tied to the company’s organic growth and its ability to take on new client assets coming in from new advisors joining the company with their books of business.

Phil Shaffer, a Columbus, Ohio-based advisor who left Morgan Stanley before it exited from the broker protocol to set up his new practice, Halite Partners, in June, says the transition wouldn’t have been as straightforward if he had left the wirehouse after it exited the broker protocol. He says he was able to bring $1 billion in client assets from Morgan Stanley to his new firm, where he is CEO, and says there is up to $3 billion more in transit.

Shirl Penney, the New York-based president and CEO of Dynasty Financial Partners, which provides services to broker-dealer teams that want to become independent RIAs, says advisors are feeling "frustrated" that wirehouses that exit the broker protocol are "taking a stand that they own their client relationships versus the advisor."

He adds that advisors are also wondering if any regulatory body will engage if the exits from the broker protocol "meaningfully" impact consumers.

Finra has said it isn’t going to intervene in the "who-owns-the-customer" debate that’s resurfaced in the financial advisory industry because of the high-profile exits from the broker protocol.

The broker protocol "is an agreement between the firms, so Finra is not part of it," a Finra spokeswoman tells FA-IQ in reaction to suggestions received by the publication about the regulator’s role in defining who owns the customer -- the broker-dealer firms or the advisors.

WealthSource Partners’ Sullivan believes the voluntary adoption of the broker protocol, which has more than 1,700 signatories, is "good for the industry and good for clients."

He says the broker protocol recognizes that clients make their own choices about which firms they want to work with.

"A reversion from that policy puts the industry, the advisors and their clients all at odds with each other," he says. "It’s now as if Morgan Stanley and UBS have said, ’It’s our ball, we’re taking it with us and going home.' It’s bad for everyone."

Morgan Stanley, UBS and Citigroup have tied their decision to exit the broker protocol to advisor retention initiatives.

Morgan Stanley included its decision to exit the broker protocol in an announcement it made in late October about a "new talent investment strategy." In that announcement, the wirehouse said the broker protocol "is no longer sustainable" in its current state. It claims the agreement "has become replete with opportunities for gamesmanship and loopholes" within the industry. Morgan Stanley stated that firms have "opportunistically joined" the protocol to make a strategic hire and then withdrawn; invoked the protocol's benefits when hiring while using non-protocol affiliates to circumvent its rules when losing talent; and unilaterally made exceptions to the scope of the protocol.

UBS Wealth Management Americas President Tom Naratil has said, after its exit from the pact, that UBS’s top priority is helping its advisors reach their full potential, not recruiting advisors from its competitors.

Citigroup said it was acting in a way that is "similar to others in the industry."