Georgia Ruling Arms Firms Looking to Overthrow the Recruiting Protocol
A recent state court ruling has cast doubt on a key provision of the Protocol for Broker Recruiting, putting more pressure on the already weakened advisor-recruiting agreement and erecting a new barrier in the form of “garden leaves” to FAs looking to take old clients to new firms, industry experts tell FA-IQ.
At the end of June a Georgia court ruled that four advisors who left one signatory to the Protocol, Aprio Wealth Management, in 2014 to join Morgan Stanley, a founding signatory to the 14-year-old Protocol that recently opted out of it, did not live up to a promise which they had agreed to on joining the firm: to give a couple of months formal notice before departing. In the event, Aprio says the advisors gave immediate notice — and immediately undertook to inform clients of their move, as allowed under the Protocol.
Though technically limited in scope to goings-on in one state, the Georgia ruling is bound to reverberate across the U.S., says New York-area compensation consultant Andy Tasnady. In his view, firms that have left or never joined the Protocol and can impose a mandatory notice period on departing advisors. And this could prove “a major hindrance for advisors hoping to maximize their percentage of clients and assets” from their old firms on joining or starting another.
The ruling is also important because it skews the perception of the Protocol’s power, according to veteran securities lawyer Steve Insel. “The Protocol in general was considered to override most restrictive covenants limited to the basic contact information allowed” under the agreement, he tells FA-IQ.
With that understanding put in question by the Georgia court, the ease with which advisors can leave without having to sit out “garden leave” periods of several months or more becomes “a state-by-state issue” limited only by “what the firms can impose on advisers without a revolt,” says Insel of the Los Angeles-based law firm Elkins Kalt Weintraub Reuben.
In wealth management, garden leaves — a U.K. term for an enforced but paid time off between jobs, usually with strict non-solicitation provisos — are advantageous to firms with outbound FAs because it gives them time to introduce clients to replacement advisors (and maybe disparage departures as products of greed or disloyalty) while departing advisors are required to sit on their hands.
“Advisors who think they own their practices are learning that, from a legal standpoint, that is not true,” says Insel. “In some states it may be, or may become, very difficult to take their practice to another firm.”
And as big financial firms seek to iron out conflicting state rules in the name of harmonized compliance, the impact of the Georgia ruling may not be restricted to one state or other states with relatively weak employee-protection laws and precedents.
“There is movement to allow national firms to impose one state’s law on all employees, a divergence from the general principle that the law of the state of employment rules,” Insel tells this publication. “Even in California, maybe the most pro-employee state in the area of restrictions, there have been developments that could create an issue on applicable state law.”
Elkins Kalt Weintraub Reuben
In this light, says Insel, the potential cost of litigation alone may be enough to make some advisors think twice about leaving, if leaving with their books of business more or less intact is a goal.
The Protocol was founded in 2004 by three of the five biggest retail brokerages to trim legal costs associated with brokerage-to-brokerage advisor moves. Now, with over 1,400 signatory firms, it remains the recruiting standard not just for inter-brokerage traffic but also for movement between brokerages and independent RIAs.
But since then, and especially since the recession, recruiting trends have changed in favor of small firms — prompting erstwhile Protocol stalwarts like Morgan Stanley, UBS and Citibank to ditch the standard last year, and take harder lines on departees.
“When the competition was mainly among major firms, the protocol made more sense,” Insel explains. “But with the ever-growing emergence of breakaway brokers to independent firms — their own newly-formed firms or others that provide more independence — major firms have come to see the Protocol” more as a blunt weapon that gets used against them than as a time- and money-saving recruitment tool.
For this reason, advisor headhunter Danny Sarch is struck by one firm’s role in the Georgia case.
“Am I the only one to see the irony that it’s Morgan Stanley – the first to leave the Protocol, the most litigious firm in the land – that lost this case?” asks Sarch, who runs the Leitner Sarch Consultants in White Plains, N.Y.
Though garden leaves have long been in play for private banks and trust companies (where practitioners aren’t, and never have been, seen to own their client relationships), the Georgia ruling paves the way to Protocol-leavers such as UBS and Morgan Stanley “adding garden-leave provisions to their employment agreements as a further deterrent to leaving.”
The rub for such firms: adding a garden-leave clause now may eventually come in for dispute as an example of “changing the rules of the game on employees who have been there for years,” Sarch tells FA-IQ.
Further, Sarch wonders what will happen to this hard-line policy when — as he thinks likely — “a client sues a brokerage firm for not being allowed to talk with his or her trusted advisor?”
For advisor recruiter Barbara Herman, the Georgia ruling combined with big-name departures from the Protocol is “a harsh reminder advisors need to pay attention to what’s in their employment agreements.”
In the past, adds Herman, who works at Diamond Consultants in New York, most FAs “paid little attention to the language in these agreements, including bonus awards,” because they assumed “the Protocol would be there to negate any restrictions.”
Morgan Stanley and Aprio declined to comment on the decision or its possible implications.