Step one: Withdraw from the broker protocol

Pulling out of the protocol proved to be one part of multipronged strategies by Morgan Stanley and UBS to reduce broker attrition. So far, their plans seem to be working

Nov 10, 2018 @ 6:00 am

By Bruce Kelly

Tired of having to pay six-figure bonuses to replace some of their most productive brokers who left for competitors after the financial crisis, Morgan Stanley Wealth Management and UBS Financial Services upended the wealth management industry one year ago by withdrawing from an agreement known as the protocol for broker recruiting. The move was a determined effort to hold onto more of their brokers.

For the most part, the decision has worked out. The number of brokers departing Morgan Stanley and UBS appears to have slowed, although both firms are still losing some of their top advisers to competitors. Other of their brokers continue to break away to start or join investment advisory firms.

While the firms' withdrawal from the broker protocol received most of the attention, an examination by InvestmentNews shows the withdrawal was only one part of multipronged, carefully implemented strategies at both firms. The intent was to cut reliance on recruiting, which is costly. Instead, Morgan Stanley and UBS are focusing on organic growth of advisers' books of business through investments in technology. They are also emphasizing compensation that provides incentives for brokers to stay at the firm and policies that discourage them from leaving.

The creation of the broker protocol was the industry's way of tamping down litigation and other issues that emerged around privacy of client data. In 2004, Merrill Lynch, UBS PaineWebber and Smith Barney were the founding signatories of the agreement, formally known as the Protocol for Broker Recruiting. Morgan Stanley and Wachovia Securities (now Wells Fargo Advisors), the remaining wirehouse firms, followed in 2006.

Under the protocol, firms agree that they will not enforce restrictive covenants, such as noncompete and non-solicitation provisions, in employment contracts as long as the departing brokers limit the client information they take with them to their new employer and agree not to contact their clients until after they leave. They may leave with a client's name, address, phone number, email address and account title.

InvestmentNews data, although not complete, show that attrition at Morgan Stanley has been cut almost in half since it withdrew from the broker protocol. For the 12 months through September 2016, the year before the firm left the agreement, InvestmentNews tallied 70 teams or individual advisers leaving Morgan Stanley for competitors. For the same period ended this September, just 38 left.

Count of wirehouse advisers/teams lost over the last 3 years by firm
Source: Investmentnews Research

Evidence that adviser attrition has slowed at UBS is less clear. In fact, InvestmentNews data show that UBS attrition has been steady over the past two years. For the 12 months through September 2016, InvestmentNews counted 33 teams or individual advisers leaving UBS for competitors. For the same period ended this September, 37 had left.

But a source with knowledge of UBS' wealth management business claims attrition had basically been cut in half, although the source did not disclose specific figures. Many of those leaving are less desirable, less productive advisers, the source said.

Anxiety and fear

If Morgan Stanley and UBS's aim in leaving the agreement was to sow anxiety and fear among advisers thinking about leaving their firms, industry experts say they have been successful.

"Moving has always been a challenge, but it's a much bigger challenge now," said Danny Sarch, an industry recruiter. "Advisers are either scared of legal machinations by the firm or don't want to go through the hassle."

Executives from Morgan Stanley and UBS declined to comment for this story.

Tearing up the broker protocol didn't occur in a vacuum. Indeed, it was part of concentrated strategies at both Morgan Stanley and UBS to keep brokers and advisers tied to the firms, industry executives said. That kicked off in the spring of 2016, when UBS said it was pulling back from recruiting to focus more on services and technology for its current workforce. Morgan Stanley and Merrill Lynch later made similar moves and placed less emphasis on recruiting, a high-cost endeavor that many senior executives on Wall Street dislike.

When major firms recruit brokers, it is not unusual for them to offer bonuses worth several hundreds of thousands of dollars. The bonuses are made in the form of forgivable loans that typically are written off over a three- to seven-year period as long as the broker stays at the firm.

Both Morgan Stanley and UBS are starting to see dividends from the reduction in recruiting. When UBS' parent company released its first-quarter earnings earlier this year, it reported that recruitment loans to financial advisers had declined 20% in the quarter from the same period a year earlier.

Largest Advisers/Teams Leaving UBS by AUM in last 12 months (thru 9/30/18)
Date Adviser Name (s) Adviser/team AUM ($M) Firm Leaving Firm Joining City State
Q3 2018 Steve Levine $2,000 UBS Financial Services First Republic Securities Los Angeles CA
Q2 2018 Brian Bova, David Leeds Eustis, and Marc Oster $2,000 UBS Financial Services Purshe Kaplan Sterling Investments Houston TX
Q4 2017 Kurt Sylvia $1,200 UBS Financial Services JPMorgan Chase & Co. Palm Beach FL
Q3 2018 Patrick Amato and Robert Waldbauer Jr. $753 UBS Financial Services JPMorgan Chase & Co. New York NY
Q4 2017 Richard Edge and John Minson $600 UBS Financial Services JPMorgan Chase & Co. Atlanta GA
Source: Investmentnews Research

Morgan Stanley has seen "very little attrition, and as a result, we are doing very little recruiting," the company's CEO, James Gorman, said in a conference call with analysts in July. "We like growing in-house, and we're doing that successfully. And clearly, it's an economically much-better proposition."

Both Morgan Stanley and UBS are betting on organic growth and continue to take steps to tie their brokers more closely to the firm. One way to do that is to invest in technology and get brokers to use that technology by dangling a carrot in the form of greater pay to do so.

In May, Andy Saperstein, Morgan Stanley's co-head of wealth management, explained how a new financial planning program called the goals-planning system would help brokers. The firm is betting advisers will use the new, integrated wealth management platform to grab some of the roughly $2 trillion in assets its clients currently hold outside the firm.

When the firm unveiled its new compensation plan in July, top among the potential rewards for advisers was an opportunity to boost payout by up to 3 percentage points through incentives for financial planning activity and net new assets, a clear example of a carrot.

In October, Morgan Stanley said it was sweetening its retirement package for high-producing brokers. It encourages top advisers to remain at the firm by adding 10% to 50% of their production to post-retirement bonuses. The catch? Brokers must agree to pass books of business to younger colleagues when they depart. If the advisers sign the agreement but then leave, they are barred from working at a competitor for 90 days and lose the bonus.

More teamwork

In October, UBS said it wants to boost the number of brokers working in teams, another tactic that typically makes it harder for an adviser to leave. If a team wants to exit, everyone on the team has to agree to the move. Senior partners, who generally are less inclined to leave, can exert a tremendous amount of influence on other team members because they often control the team's revenue and salaries, noted Casey Knight, executive vice president of recruitment at ESP Financial Search.

One big question is whether wirehouses such as Morgan Stanley and UBS in the future will include "garden leave" provisions in employment contracts, tethering advisers even more tightly to the firms.

Garden leave refers to a period during which employees who are in the process of terminating their employment stay home for a period of months. While they're still on the payroll of their old employer, they usually are not given anything to do; nor are they allowed to start working for their new employer.

(Watch: Has leaving the broker protocol worked? )

The common fear under such a contract is that the adviser would be blocked from any contact with clients and eventually lose them.

Not everything has gone Morgan Stanley's and UBS'​ way.

For example, UBS failed when it rolled out a plan earlier this year to connect a broker's annual bonus to an agreement not to solicit clients after moving to a new employer. After an uproar by advisers, it had to take that restriction on bonus pay off the table, at least for now.

Morgan Stanley has been particularly aggressive in filing temporary restraining orders against advisers when they leave, but has not had great success using this tactic, industry attorneys and recruiters noted.

In September, it filed a TRO against a team of half-a-dozen advisers from Bourbonnais, Ill., with $660 million in assets and $4.2 million in annual revenue, who had moved to Stifel Nicolaus & Co. Days later, Judge Joan B. Gottschall of U.S. District Court for the Northern District of Illinois denied Morgan Stanley's TRO, which alleged the brokers had violated non-solicitation agreements.

Many in the industry believe that brokers and advisers will continue to migrate away from Wall Street firms, including Morgan Stanley and UBS, but likely at a slower rate. The path to an independent broker-dealer like Raymond James Financial Services Inc. or an RIA platform like Dynasty may have narrowed in the past year, but it's still open.

"I've counseled many advisers who have left Morgan Stanley or UBS without issue," said David Gehn, a partner with the law firm of Ellenoff Grossman & Schole. "But you don't get the E-ZPass lane anymore. It's like waiting online and paying the toll, but guess what? In the end, you still get over the bridge."

Big teams continue to leave. JPMorgan Securities has been particularly successful in picking off Morgan Stanley brokers and advisers. In the past year, five individuals or groups of advisers with $6.9 billion in client assets left Morgan Stanley to work at JPMorgan Securities, according to InvestmentNews data.

Largest Advisers/Teams Leaving Morgan Stanley by AUM in last 12 months (thru 9/30/18)
Date Adviser Name (s) Adviser/team AUM ($M) Firm Leaving Firm Joining City State
Q4 2017 Colleen O'Callaghan $2,500 Morgan Stanley Wealth Management JPMorgan Chase & Co. New York NY
Q4 2017 Robert S. Gilman, Robert Kushel, Jed A Morton and David Stanford $1,600 Morgan Stanley Wealth Management JPMorgan Chase & Co. New York NY
Q4 2017 L.O. Patrick Corbett, Robert F. Mason and Daniel Warren $1,200 Morgan Stanley Wealth Management JPMorgan Chase & Co. Boston MA
Q4 2017 Frank Botta, Daniel McCarron and Mike Coyne $1,100 Morgan Stanley Wealth Management JPMorgan Chase & Co. Boston MA
Q2 2018 David R. Reiser $500 Morgan Stanley Wealth Management JPMorgan Chase & Co. New York NY
Source: Investmentnews Research

In the end, the business incentives for brokers to leave Wall Street may be too great for some to pass up.

Advisers at a wirehouse are typically paid between 35% and 45% of every dollar in revenue they create. They can more than double that payout if they move to a registered investment adviser or independent firm, although their expenses will increase, too.

"Our recruiting pipeline has never been more robust, and it includes a lot of folks from Morgan Stanley and UBS," said Rob Mooney, head of RIA Snowden Lane Partners and one of the architects of the protocol agreement when he worked at Merrill Lynch in 2004. "You just have to evaluate their particular circumstances and proceed accordingly."

The future for the protocol is far from certain. Merrill Lynch remains in the agreement and so does Wells Fargo Advisors. But many believe they could change their strategy, particularly as Morgan Stanley and UBS see success in hanging onto advisers and slowing attrition.

"Merrill Lynch and Wells Fargo Advisors are taking a wait-and-see approach," said Louis Diamond, executive vice president at Diamond Consultants.


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