Two weeks ago, Morgan Stanley kicked over what could be the first domino in a sweeping shift away from broker protocol policies, and the financial services industry is still trying to figure out what it all means.
From Morgan Stanley's perspective, as the largest wirehouse by rep head count, it looks very much like a sign of desperation, as well as an unintended acknowledgment that the trend of reps leaving wirehouses is taking its toll on the traditional brokerage business.
(More: What's Morgan Stanley's rationale for exiting the Broker Protocol?)
While the broader financial advice industry has never been more robust and dynamic, Morgan Stanley's ranks have dropped to 15,800, down 700 reps over the past five years.
Brokerage reps have been racing toward the independent advice channel, a movement enhanced over the past year by the unfolding complexities of the Department of Labor's fiduciary rule.
Morgan Stanley's official reason for dropping the Protocol for Broker Recruiting agreement is that it "will allow the firm to invest more heavily in its world-class advisers and their teams, helping drive additional growth opportunities."
But for most of us outside Morgan Stanley, it looks more like raising the drawbridge and filling the moat with crocodiles, making it much more difficult for advisers to exit.
Remember, the protocol agreement was originally written in 2004 as basic guidelines for advisers moving between brokerage firms.
As long as the departing advisers adhered to the rules, which included taking with them limited information about existing clients, the brokerage firms agreed to a cease-fire on the aggressive legal challenges that were commonplace prior to the protocol agreement.
The original three-page document was signed by Merrill Lynch,
UBS, PaineWebber and Smith Barney. Morgan Stanley joined two years later.
For a while it made sense, and seemed to work.
But perhaps due to the simplicity of the original agreement, which failed to define a brokerage firm, the list of protocol firms has expanded to nearly 1,700, most of which are not brokerages.
And many of the actual brokerage firm participants have pursued various carve-outs and revisions to the original document that Morgan Stanley claims has made it "no longer sustainable."
There is no denying the old protocol applecart is suffering from wear and tear, but that doesn't seem to justify upending it, which is essentially what Morgan Stanley has done.
As of this writing, no other major firm has yet dropped from its protocol agreement. Some may in fact see staying in the protocol as a recruiting incentive.
But industry insiders know that pressure on the protocol has been building for years. With Morgan Stanley the first out of the agreement, it's possible the rest of the industry will follow suit.
The protocol really only makes sense if all the major players are on board, and with the breakaway trend in full force, the major players are no longer as focused on advisers moving between brokerage firms.
It is far from clear what Morgan Stanley's endgame might be, but by dropping the protocol, the wirehouse brings back the lawsuits and temporary restraining orders that hounded advisers in the past as they tried to take their business, including clients, elsewhere.
Longer term, it's hard to see the upside for the brokerage industry. Firms will be able to make it more difficult for an adviser to leave, but as clients get wise to the idea they are regarded as property, that could trigger a whole new, and more devastating, set of dominoes for the brokerage industry.
