High-profile departures notwithstanding, broker protocol is not dead yet.
In the wake of Morgan Stanley's surprising Halloween exit from the Protocol for Broker Recruiting agreement, there was widespread speculation of a domino effect as firms abandoned the 14-year-old agreement aimed at enabling brokers to more easily move among firms.
The official protocol list, which is tightly maintained by the Columbus, Ohio law firm of Carlile Patchen & Murphy, shows that while 17 firms exited the protocol last year, 218 joined.
That's up from 166 new firms in 2016.
The total count of 1,715 protocol firms includes nine new additions this year, compared with no new exits in 2018.
It's also worth noting that 34 firms joined the protocol after Morgan Stanley's late-October departure.
Many of the firms joining are newer and smaller, and are often joining to facilitate a new hire.
"We joined to facilitate the hiring of a new partner," said Dustin Latham, founder of Alternative Capitalis.
The 2-year-old advisory firm with $14 million under management joined the protocol on Dec. 14.
"We saw the larger wirehouses moving away from protocol, and we looked at it from the standpoint of being as transparent as possible," he added. "I'm not in a position where we're actively looking to bring on new advisers, so this could be a one-time situation for us."
Sheldon Goldman, owner of Goldman Wealth Management & Associates, joined the protocol on the same day in October that Morgan Stanley announced its departure.
His $60 million advisory firm is less than 6 months old, and he saw the protocol as a way to "insulate us from litigation from other firms."
"In my mind, there are two reasons to join the protocol," Mr. Goldman added. "Advisers know I'm a firm you can come to, and advisers know they don't have to depart our firm without those protections. It's kind of like traveling overseas with an insurance plan: before I catch that flight, I want to know that I have those protections in place."
Whether joining or exiting protocol, firms will be working with a new protocol administrator starting this week.
As of Monday, the protocol administrator role was switched to Palatine, Ill.-based Capital Forensics from the New Jersey law firm of Bressler, Amery & Ross, which had been the administrator since 2015.
This represents the fourth administrator switch since broker protocol was created in 2004.
Prior to Bressler, the Securities Industry and Financial Markets Association acted as administrator starting in 2010. SIFMA took over the administrator role from the New York law firm of Wachtell, Lipton, Rosen & Katz.
Unique from the list maintained and published by Carlile, Patchen & Murphy, the administrator is the official record keeper and publisher of a weekly list of protocol member changes.
For smaller advisory firms that are more likely to hire away from brokerage firms, there is no downside to joining the protocol, according to Brian Hamburger, chief executive of the compliance consulting firm MarketCounsel.
"The cynic in me says these name-brand firms that are scurrying away from the protocol certainly take a lot of the benefit away from being a member," he said. "But the firms that are joining are saying, 'this is the right thing to do.' I'm a huge believer that clients deserve the protections of protocol."
While some are busy speculating on whether Merrill Lynch will be the next major brokerage to exit the protocol, Mr. Hamburger believes there is potential for a momentum shift, driven by regulatory influences.
"If you start to see a number of legal actions where the broker did everything right, but clients were precluded from getting everything they needed, I think the regulators will have to step in," he said, recalling the litigation-laden days prior to the original 2004 protocol agreement.
"How embarrassing would it be (for the wirehouses that already exited) if regulators have to impose broker protocol?" Mr. Hamburger said.
Matt Sonnen, founder and chief executive of the custodian firm PFI Advisors, said that the market forces are already pushing back against the trend of larger firms exiting the protocol.
He cites the mid-November announcement by Raymond James Financial expressing a commitment to the protocol.
"I thought the move by Raymond James was brilliant," Mr. Sonnen said. "Within a week of Morgan Stanley shocking the world with its announcement, Raymond James announced that they are not leaving the protocol. My guess is, that's why other firms are joining right now, to try and recruit some advisers."
Meanwhile, HighTower Advisors chief executive Elliot Weissbluth doesn't have a lot of confidence that the larger brokerage firms will reverse course on their own to suddenly start re-embracing the protocol.
"They are trying to hold onto their business and their clients, and they are closing the back door so none of these folks can leave and take their clients with them," he said. "It would behoove the industry to do the right thing, but when have these big brokerage firms ever done the right thing?"
Christine Jockle, a spokeswoman for Morgan Stanley, said exiting the protocol will allow the firm to invest more heavily in its "world-class advisors and their teams, helping drive additional growth opportunities."
UBS declined the comment for this story.
Mr. Weissbluth said ultimately, the situation could break down to a point where the regulatory structure is tested.
"I think there's still going to be a big food fight in the industry, and people will start to test the waters and test the rules, literally on a state by state basis," Mr. Weissbluth said.