In 2004, the Protocol for Broker Recruiting (the “Protocol”) was established with the goal of furthering “client interest of privacy and freedom of choice in connection with the movement of their Registered Representatives between firms.” The Protocol defined what information a registered representative could take when moving between signatory firms, how that information could be used, and when it could be used. The Protocol has provided brokers and registered representatives important clarity for the past 13 years, which has cut down significantly on litigation associated with moves from one signatory firm to another, including from brokers to investment advisers.
In a letter dated October 24th, Morgan Stanley, one of the largest employers of registered representatives, announced its withdrawal from the Protocol. According to Morgan Stanley, the Protocol is “replete with opportunities for gamesmanship and loopholes” and is “no longer sustainable.” In particular, Morgan Stanley has been frustrated by the ability of talented advisers to take advantage of the Protocol’s terms to establish independent registered investment advisers (“RIAs”) and solicit the clients they served while employed by Morgan Stanley. Still, the firm’s withdrawal is the most significant in the history of the Protocol. Since 2004, more than 1,600 firms have become signatories, and only 100 have withdrawn.
Following Morgan Stanley’s announcement, speculation as to its significance for the investment advisory industry has been rampant. Some are asking whether “Morgan Stanley’s exit from the protocol will usher in its end.” Supporting that speculation is the silence of Morgan Stanley’s largest competitors in response to the withdrawal.
Some large firms may determine that they are able to derive a competitive advantage in recruiting by remaining signatories of the Protocol. However, large firms that decide to withdraw from the Protocol, will likely be forced to offer top talent some of the same post-termination rights found in the Protocol and will experience significantly greater litigation cost. Those rights can be inserted into employment contracts. Alternatively, firms could increase financial incentives to compensate top advisers for the loss of those rights. Either way, this course of action will increase the cost and complexity of maintaining a talented team of advisers.
The more likely scenario is that Morgan Stanley’s withdrawal (and any similar firm’s withdrawal) is likely to hasten, not slow, the flow of advisers from the traditional, large brokerage firms to independent advisory firms. That flow has been so great in recent years that assets under management at registered investment advisers doubled between 2007 and 2015. The most significant change for advisers employed by firms that withdraw from the Protocol is that they will need more sophisticated legal counsel to handle the process of establishing and transitioning to an independent advisory firm.