Industry Veterans Matasar, Diamond And Waxelbaum Discuss The Broker Protocol, Its Effects On Recruiting And Whether Advisors Should Worry About SVB’s Withdrawal
The Protocol for Broker Recruiting, or Broker Protocol, was established in 2004 among Smith Barney (now part of Morgan Stanley), Merrill Lynch and UBS. Kitces.com states, “The Broker Protocol came into existence as a form of ‘cease fire’ between major broker-dealers, who routinely ended out in litigation with other broker-dealers whenever a broker changed firms.”
With 19 years of history, thousands of firms have joined the protocol, while some have withdrawn, including two of the founders – Morgan Stanley and UBS. Regardless of notable withdrawals, today the protocol stands as an established fixture in the advisor recruiting and wirehouse breakaway landscape.
As reported in WealthManagement.com, SVB Wealth, an arm of the recently collapsed Silicon Valley Bank that was purchased by First Citizens Bancshares, withdrew from the protocol effective April 23, in a move aimed at slowing advisor attrition.
In order to understand whether the SVB Wealth withdrawal is a harbinger of further firms withdrawing from the protocol, and to examine the current and future state of the protocol and its effects on advisor recruiting and wirehouse breakaways, we spoke to industry experts.
A Performance Check On The Protocol
“As a young lawyer I spent a lot of Monday mornings either trying to obtain a temporary restraining order (TRO) after my client lost a big producer the prior Friday or trying to block a TRO because my client had picked up a big producer,” recalls Scott Matasar, Member of Matasar Jacobs.
“The protocol was created to reduce constant litigation among firms over recruiting matters,” Matasar continued. “From that standpoint, the protocol has achieved its main purpose. The frequency of non-compete/non-solicit litigation in the industry is much less, and protocol signatory firms can recruit freely without worrying about being dragged into litigation against a financial advisor they’ve onboarded.”
Phil Waxelbaum, Founder and Principal of Masada Consulting, agrees that the Broker Protocol is achieving its purpose. “The few departed firms, notably UBS and Morgan Stanley, have muddied the waters but to nominal impact. Advisors and their lawyers have mastered the ‘non-protocol’ move. Total success expectation, both coming and going, is slightly slowed and results are no more than 10% less effective than with the protocol.”
With the industry landscape continuously evolving, Waxelbaum says that the protocol has evolved like a living organism. “As the roster grows the character changes of its own weight. Most critically, the protocol assures compliance with Reg S-P,” which safeguards client records and information.
Louis Diamond, President of Diamond Consultants, believes the next version of the Broker Protocol should require a minimum length of membership, in contrast to the current protocol that allows firms to join and withdraw easily. “Additionally, there should be ‘rules of conduct’ for member firms that restrict particular questionable client retention behavior, like offering free fees for a year, speaking negatively of teams that leave or slowing down ACAT paperwork on purpose.”
Matasar notes that the current trend is toward splintering the protocol as firms file carveout letters with the protocol administrators that bar “various categories or titles of associated persons from the protections of the protocol. This is further complicated by consolidations and mergers in the retail financial service sectors among firms with differing protocol status.”
Is SVB A Harbinger Of Aggressive Protocol Withdrawals?
Matasar states that the withdrawal of SVB Wealth from the Broker Protocol seems driven by the firm’s specific situation and not related to a larger trend. “When UBS and Morgan Stanley withdrew from the protocol, industry observers questioned whether it would set off a stampede of firms leaving the protocol, but it never happened. The fact that protocol participation continues to be on an upward trend demonstrates that, for many firms, being part of the protocol aligns with their personnel and recruiting philosophies.”
Similarly, Waxelbaum believes that nothing can be read into the SVB Wealth withdrawal. “It was a tiny captive advisor base of functionally ‘bank advisory’ advisors. Circumstance makes it even more of a unicorn. Banks are significant sources of bank advisor relationships. Not ring fencing those relationships would be bad governance. No expected trends here.”
Diamond proposes a logic to SVB Wealth’s withdrawal: “If you aren’t recruiting advisors (which appears to be the case with First Citizens), then what’s the point of remaining in the protocol where other firms can more easily poach your talent?”
Is Your Firm Leaving The Protocol?
For advisors and potential breakaways inside the Broker Protocol currently but fearing that their firm may withdraw soon, Waxelbaum counsels them with the title of Bobby McFerrin’s 1988 hit song, “Don’t Worry, Be Happy.”
He says, “Advisors can move with and without the protocol. They do it every day. While your firm departing from the protocol may make moving less convenient and add some risk, the resulting moves still deliver 75%-90% plus of desired clients to the new firm.”
“The critical must-haves are topflight counsel, both legal and practice management,” Waxelbaum adds. “The new firm should bear the costs and the legal counsel should be an expert in protocol and FINRA standards. Advisors are not trapped.”
For Diamond, the situation is a call to action for the advisor: “What are you waiting for if you know you will move and fear your firm will pull out of the protocol? While you can still move without protocol protection, it is much easier to do so when you can solicit clients and take your protocol spreadsheet.”
For advisors who are not close to the threshold, Diamond counsels, “Don’t rush things or make a rash decision simply to get out ahead of a possible protocol withdrawal.”
The World Outside The Protocol
For many advisors, the Broker Protocol is not an option. But as Waxelbaum said above, advisors are not trapped.
“For many years, membership in the protocol was mission-critical for those firms looking to recruit advisors. But, since Morgan Stanley and UBS withdrew in 2017, that has changed a bit,” said Diamond, who notes that these banks and others outside the protocol have had recruiting success.
“And when advisors join/leave a non-protocol firm, we see similar portability,” Diamond continues. “Especially since a ‘playbook’ has been developed for such moves, there is much more of a process around successful non-protocol breaks. But firms without the brands and reputations of Morgan Stanley and UBS are disadvantaged if they are not part of the protocol.”
Matasar sees less advisor attrition at firms that have withdrawn from the protocol, and says litigation depends more on the advisor’s conduct and terms of their contract than on whether the firm they’re departing is within the protocol. “As a general rule, advisors are hiring me after being sued either because they left a small RIA whose egotistical founder is out for vengeance, or because the advisor blatantly ignored their contracts, putting a target on their back when they resigned.”
Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org.