Morgan Stanley dumps broker recruiting protocol

Brokers moving to a new firm would be forbidden for 12 months from contacting clients once they left

Oct 30, 2017 @ 11:26 am

By Bruce Kelly

Morgan Stanley's decision to leave an industry agreement known as the protocol for broker recruiting is an indication that the firm is working harder than ever to prevent its brokers from jumping ship, industry sources said.

One reason for that perspective is that Morgan Stanley managers were told on Monday morning that new employment agreements may include a one-year non-solicit agreement. Under such an agreement, Morgan Stanley brokers moving to a new firm would be forbidden for 12 months from contacting clients once they left, according to those sources.

Morgan Stanley intends to withdraw from the protocol on Friday.

Morgan Stanley advisers were told in an email Monday that the firm would enforce client confidentiality and non-solicitation agreements.

(More: Morgan Stanley dumps broker recruiting protocol)

"With our exit from the protocol, advisers are subject to the terms of any applicable client non-solicitation restrictions and/or confidentiality obligations, including restrictions on removing client-related information," according to the email. "The provisions of the protocol that permit advisers to take certain client data and solicit clients when transitioning from one protocol firm to another will no longer apply."

"It means that Morgan Stanley could go to court and get a [temporary restraining order] against any adviser who leaves," said Danny Sarch, an industry recruiter, who noted that the firm had recently filed TROs against advisers who inherited client accounts from other advisers and had recently moved to competitors. "What's Morgan Stanley's strategy now? It's like the Hotel California," he said, referring to the classic song by the Eagles. "You can check in but you can never leave."

One veteran adviser wondered whether a non-solicit agreement could be applied to existing accounts or only to new clients. "Would that be supported for accounts retroactively or newly opened," asked the adviser, who requested to speak anonymously. He added that he had not seen anything in writing from the company about a new non-solicit agreement.

"A non-solicit means advisers can't reach out to clients but [clients] can reach out to advisers," noted Howard Diamond, chief operating officer and general counsel for Diamond Consultants, an industry recruiter. "In the fiduciary era, clients want to go with their advisers. We think this is incredibly short-sighted and takes adviser choice away."

(More: Morgan Stanley is waving the white flag on recruiting)

"Investors have long relationships with brokers, although firms like to think the relationship is with the firm, and sometime it is," said Brent Burns, an industry attorney. "But most of the relationship is with the adviser. Watch all the ads on TV — the broker is at the wedding, he's there when the baby is born."

"Now Morgan Stanley is saying, you can't take or service the client," he said. "I think brokers will still leave Morgan Stanley and clients will contact them. Will Morgan Stanley then go after the advisers? And will the other firms follow?"

"Morgan Stanley expects all departing [financial advisers] to honor their non-solicitation obligation," said company spokeswoman Margaret Draper.

Morgan Stanley on Monday said that as part of its effort to reduce recruiting and emphasize training it was pulling out of the protocol, a more than decade-old industry agreement designed to limit litigation against brokers when they moved from one firm to another.

Before the 2004 agreement, it was common for large firms like Morgan Stanley and Merrill Lynch to sue advisers when they left, commonly freezing clients from trading in their accounts.

The protocol established a methodology for a broker to depart which, if followed, would no longer subject them to temporary restraining orders or other legal machinations. It also protected client privacy by forbidding brokers from copying their books ahead of time and providing the client data to their new firm without their clients' consent.

The protocol established a "universal set of rules for advisers to follow when leaving one protocol member firm and joining another," Morgan Stanley said in a statement. "However, over time the protocol has become replete with opportunities for gamesmanship and loopholes."

(More: Morgan Stanley says recruiting and attrition have slowed down)

Firms have not been following the spirit of the agreement, according to Morgan Stanley. "Firms have opportunistically joined the protocol to make a strategic hire and then dropped out," according to the company statement. "Firms have invoked the benefits of the protocol when hiring while using non-protocol affiliates to circumvent the protocol when they lose talent."

The announcement was part of a wider statement about Morgan Stanley's efforts to support existing advisers.

Morgan Stanley in May said it was joining competitors like UBS Financial Services and Merrill Lynch by reducing its reliance on recruiting experienced advisers with big signing bonuses and instead make changes that would emphasize building in-house staff.


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