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Are Morgan Stanley and Merrill Lynch Exploring a Broker Protocol 2.0?

By Miriam Rozen August 27, 2018

For the majority of Peter Sargent’s 25-year financial advisory career, he has worked at wirehouses belonging to the Protocol for Broker Recruiting Agreement. No surprise, then, that Sargent vigorously extols the virtues of what once ranked as the industry-wide keep-the-peace pact.

“It ultimately helps to protect the client by allowing for uninterrupted delivery of advice and service to investors by their advisor if they change firms,” says Sargent, who leads Sargent Wealth Management of Janney Montgomery Scott in Yardley, Pa. He previously worked for nearly two decades at Merrill Lynch.

But given that big wirehouses — including Morgan Stanley and UBS — dropped out of the Protocol last year, and speculation continues to swirl around Merrill Lynch's potential withdrawal, some brokerage industry stakeholders have begun discussing a hypothetical Protocol 2.0 — or a renegotiated and revamped version of the pact.

“What if they came up with a new Protocol?” proposes Howard Diamond, the chief operating officer and general counsel of Diamond Consultants, a New York-based recruiting firm.

Diamond joins other recruiters — including Danny Sarch, president of Leitner Sarch Consultants, and Ron Edde of Millennium Career Recruiters — in applauding the idea of a 2.0.

The recruiters’ enthusiasm for a revamped Protocol might be tied to their own fees flagging because fewer advisors jump from wirehouses that dropped out of the Protocol. In the first six months of 2018, after they had left the Protocol, Morgan Stanley and UBS both lost only about half of the brokers they had lost during the same period in the previous year when the two wirehouses still were signatories of the agreement, according to an analysis of BrokerCheck reports.

Facing the prospect of fewer brokers moving firms, recruiters offer suggestions for how to improve upon the Protocol so perhaps Morgan Stanley and UBS might rejoin.

A revised version could address what Diamond tags as a major deficiency of the current Protocol — one that prompted the wirehouses to abandon it, he says. He’s referencing the Protocol’s requirement of only 10 days notice before a signatory exits from the pact. That less-than-two-weeks time period allows for widespread abuse of the Protocol, which prompted Morgan Stanley and UBS to withdraw from the agreement, Diamond argues.

When Morgan Stanley left the agreement, in late October 2017, it notified the Protocol’s law firm administrators that its final day as a member would be November 3. So advisors who might have wanted to leave Morgan Stanley before the wirehouse exited the pact had little time to do so.

Smaller advisory firms of the nearly 1,000 that are part of the Protocol have more frequently jumped in and out of the agreement at their convenience, Diamond says. Often their participation has hinged on whether they were hiring advisors or fighting defections, according to Diamond.

But Paul Foley, a lawyer at Winston-Salem, N.C.-based Kilpatrick Townsend & Stockton, who represents RIAs, believes few firms exploited the 10-day notification requirement for withdrawals from the Protocol.

“I don’t think there was a lot of abuse of the notification timing,” says Foley. “It was not as widespread as some would have you believe,” Foley says. “That is not why the major firms decided to get out. They decided to get out because they were no longer recruiting, so they are more likely to just be trying to hold onto to what they have,” Foley adds.

Other lawyers who have represented both brokers and their employers also argue that it’s time for a new pact about recruiting and for changes beyond a longer notification time period.

“The Protocol has way outgrown its roots from when it began in 2004 and there were literally three signatories,” says Thomas B. Lewis, an attorney with Stevens & Lee in Lawrenceville, N.J., who has represented both brokers and their employers in recruiting-related litigation.

Lewis concedes the prospect for a revamped agreement may not be good. “Protocol 2.0 is wishful thinking,” Lewis says. Even though, he adds, “It’s thinking that makes a lot of sense.”

Howard Diamond

If a Protocol 2.0 ever comes to fruition, Lewis would like to see a provision added in any revamped agreement that requires firms losing advisors to have an obligation to tell clients where those defectors have landed.

For Sargent, the guiding principle of the existing Protocol is the most important to preserve if any revamping occurs.

“Advisors are in the best position to know what’s best for their clients. Firms whose cultures put the advisor at the center of the client relationship, enable and empower advisors to do what they think is best for their clients, will ultimately come out on top,” Sargent says.