Why Brokerage Firms Left the Protocol -- and What Will Drive Them Back
We are pulling out of the protocol because we are going to put more resources back into supporting our advisors.
This is the line, more or less, touted by firms like Morgan Stanley, UBS and Citigroup at the end of 2017 as they departed the Protocol for Broker Recruiting in favor of their own internal structures and incentives to retain advisors thinking of making a move.
That may have sounded convincing to some, but has little basis in reality. In particular, when it came to leaving the protocol, resources are most likely not even a real factor for these firms, as being part of that agreement in fact requires no real resources at all.
Simply put, firms that pulled out of the protocol did so for a single reason: self-preservation. Many of these firms fall squarely in the categories of past, present or future net losers of advisors, and so have a high probability of being net losers of client assets.
Firms leaving the protocol are using strong-arm tactics such as restraining orders and other legal entanglements as intimidation to retain advisors who have attempted to move in a new direction.
This strategy is nothing but negative. It reinforces the message that these firms are not operating in the best interest of their clients and advisors, and it perpetuates an ethos of hostility and disenfranchisement -- leading, ultimately, to lackluster advisor performance.
These litigation threats and strong-arm tactics are already starting to have less bite as TRO requests either get rejected by the courts or withdrawn by non-protocol firms as shaky bets.
Meanwhile, non-protocol firms have begun to say they’re using internal resources to help advisors grow and acquire new assets.
For example, Morgan Stanley recently announced the formation of a 66-person group to attract and service ultra-high-net clients. But these types of services have been offered to Morgan Stanley's ultra-high-net worth clients for many years, so I’m not sure how pulling out of protocol was necessary to this supposed innovation.
On the other hand, Merrill Lynch, as of right now still in the protocol, has recently announced the same type of program -- though it too has been conducting this kind of business for years.
These launches may be good business-development ideas, either from in or outside the Protocol, but they won’t stop outflows as firms continue to lose large teams due to the firms’ attitude toward the advisor/client relationship as demonstrated by the threat of TROs.
In truth, the main engine for growth of these firms is acquiring advisors from other firms. That’s how it is in every industry. And right now, in this industry, all the real acquiring is going on with independent RIAs and independent broker-dealers, every day.
Hiring and recruiting advisors in the W2 world shouldn’t be viewed any differently. Firms need to look at advisor recruiting like M&A deals, because that’s what they’re really doing, and need to do for real long-term growth.
It’s my belief that once these firms see the real impact that leaving the protocol has on net asset flows, they will be left with no choice but to opt back in.
However, the challenge they will face from being out of the recruitment game for an extended period will show up as lost momentum and having to play catch-up. The only way they’ll be able to counter this will be to come to the market with aggressive deals again.
They will most likely begin by pitching these deals as “one-time, special deals,” and not at all a new departure. But in reality, they will continue selling these new deals until they start seeing positive net asset flows again.
The bottom line: these firms had a knee-jerk reaction to advisor attrition. But the message they’re sending is far worse than the benefit they thought they’d get from blocking the exits. The message is a short-minded view of the profession and gives advisors a glimpse of who the firms believe controls the client relationship.
The firms would have been better off simply to slow down recruiting, pay more attention to their existing advisors, be more selective about who they offer deals to, and make those deals more reasonable to their bottom lines (like any successful M&A transaction).
This reality is bearing down on the non-protocol firms with each TRO defeat. Eventually they will have to admit the fault in their strategy, face up to the fact that hamstringing advisors is never a solution, and go back into the protocol with the intent to look at the real sources of their internal profitability concerns -- which can be found in the management suite and not in the advisor’s chair.
So here's the real question: will non-protocol firms have the courage it takes to come back?