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By Rejecting the Broker Protocol, Morgan Stanley is Building a Wall

By Thomas Coyle November 3, 2017

Irony is intriguing. So when an experienced securities lawyer said Morgan Stanley’s exit from the Protocol for Broker Recruiting was finessed to give its advisors as little time as possible to react, the press seized on it — and it turns out rightly.

“Morgan Stanley Accused Of Gaming Protocol Withdrawal,” goes the headline in Financial Advisor magazine’s write-up of a dial-in conference with MarketCounsel, a compliance consultancy to wealth and investment firms. “Questions Arise With Broker Protocol Administrator as Morgan Stanley Exits,” sums up ThinkAdvisor’s take.

The specific allegation, as explained by Market Counsel’s CEO Brian Hamburger and its chief litigator Sharron Ash, is simple. Protocol leavers are supposed to give 10 days’ notice to other members, but — at least effectively — Morgan Stanley only gave three days’ notice.

MarketCounsel says Morgan Stanley took advantage of the fact notifications about Protocol comings and goings are traditionally issued on Mondays by the Protocol’s administrator, the law firm Bressler Amery Ross — which also counts Morgan Stanley as a client. Instead of signaling its departure from the Protocol on Oct. 23, which was 11 days before its Nov. 2 withdrawal, Morgan Stanley only informed Bressler on Oct. 24 — and the law firm sat on that information until early this week, giving advisors who might already have been planning to leave the brokerage less time to make their moves before the deadline, according to MarketCounsel.

The irony here stems from Morgan Stanley’s complaint in its resignation from the Protocol that other signatories were taking “opportunities for gamesmanship and loopholes” to bend the agreement to their own purposes in ways violating the spirit of the 2004 agreement that was meant to set the ground rules for advisor recruitment in an attempt to minimize litigation between firms.

But in the grand scheme of things, is four days’ less notice really such a big deal? FA-IQ asked Morgan Stanley about that, but the firm’s media representatives declined to respond, referring us instead to Bressler in its capacity as administrator of the Protocol. In turn, Bressler’s principal, Brian Amery, didn’t respond to FA-IQ’s questions about the timing of Morgan Stanley’s notice of departure.

Instead of signaling its departure from the Protocol on Oct. 23 (11 days before its Nov. 2 withdrawal) Morgan Stanley only informed the administrator on Oct. 24 — and the administrator sat on that information for a week.

For New York-based FA recruiter Mark Elzweig, it’s clear “Morgan Stanley wanted to maximize the element of surprise in its withdrawal from the Protocol” — a tactic that “doesn’t sound like a client-centric business practice” to him.

But, adds Elzweig, “neither does bringing back the bad old days of lawsuits against departing advisors in which clients get caught in the middle.”

The Protocol — now with something like 1,700 signatory firms — began as an agreement between UBS, Merrill Lynch and Smith Barney (now part of Morgan Stanley) to reduce litigation over advisor departures while furthering “the clients’ interests of privacy and freedom of choice” by spelling out what client information departing FAs can haul off and use to try to win old customers to their new perches.

“Before the Protocol, it was a carousel of litigation,” says MarketCounsel’s Ash. “Firms were paying all these lawyers every week.”

And, as FA-IQ reported more than three years ago, the Protocol seemed to have worked for a while — at least in terms of reducing lawsuits. More recently though, discontent about Protocol abuses has come to the surface.

As Ash tells it, JPMorgan damaged the Protocol a few years back by paving the way for a recruitment push, only to declare the Protocol applied to some of its advisors but not others. Similarly, signatories to the agreement have used the Protocol to get FAs in, but then said the same FAs can’t leave under the Protocol due to their internal status as directors or other “privileged information” positions.

And now Morgan Stanley has dealt the Protocol another blow, says Ash, with the timing of the move linked to its overarching reason for ditching out in the first place.

“The difference between telling the world with three days’ notice rather than 10 days is a big deal,” Ash tells FA-IQ. “You can get a lot done in seven days.”

Sharron Ash

Ash doesn’t think Morgan Stanley advisors with no previous plans to leave have been wrong-footed by the seven-day discrepancy. But those who had been planning to leave soon have had to scramble. “I can tell you that for sure,” says Ash, whose client base includes ex-wirehouse FAs who have opted for independence by joining or starting RIAs.

More than stemming near-term departures, however, Morgan Stanley is signaling it’s in retreat on the broad recruiting front, according to Ash.

When formulated, the Protocol was a wirehouse-to-wirehouse accommodation — because that’s where most top-tier advisors worked. “The Protocol made sense” for big firms “when recruiting was a revolving door,” says Ash. Now though, many successful FAs are leaving wirehouses for RIAs which don’t generally send seasoned departing advisors to big-name firms.

“Simply, recruiting between big firms used to be a wash; now it isn’t,” says Ash, noting that big brokerage firms like Morgan Stanley, Merrill and UBS are “now more focused on retention than recruiting.”

But Ash doesn’t think Morgan Stanley’s withdrawal from the Protocol will stem the breakaway tide.

“Brokers are going to continue to move even with this change,” she says — even if more big firms abandon the industry’s recruiting agreement.