Will Merrill Lynch leave the broker recruiting protocol?

The wirehouse has obviously noted its own lack of recruiting success this year, as well as the slowed attrition rates at its competitors that have exited the protocol.

This is, by far, the question I have been asked most frequently during 2018. Let’s examine the issues.

In the fourth quarter of 2017, both UBS and Morgan Stanley departed the protocol, shocking the recruiting marketplace. While I was as surprised as everyone else, I saw the moves as logical: If you are not recruiting in as many as you are losing out, for several years in a row, making it easier for advisers to leave is just plain stupid.

It does not give me any joy to say this, but in terms of slowing adviser departures, the strategy has worked.

Recruited attrition at both firms has fallen this year, though I strongly suspect that at least for the first half of the year, the numbers were artificially low. When both firms announced their intentions, they experienced a wave of departures as advisers accelerated their plans to take advantage of the protocol rules while they still could. Fourth quarter 2017 attrition was artificially high; first quarter 2018 attrition was artificially low.

But as this year has progressed, it has become quite clear that a significant number of UBS and Morgan Stanley advisers are now scared to consider a move because of the threat of litigation. Many unhappy advisers at these firms are either resigned to staying, intelligently taking their time to plan a “non-protocol” move or hoping for a Protocol 2.0.

The recruiting marketplace has reacted intelligently and predictably: Firms have focused their efforts on attracting Wells Fargo and Merrill Lynch advisers. Wells Fargo, of course, has both wirehouse bureaucracy issues and dramatic headline risks. Even while paying headhunters an above-market bounty for introductions, and paying large deals, its outflows have far exceeded the number and size of inbound recruits.

Which brings us back to Merrill Lynch.

Scanning InvestmentNews’ Advisers on the Move database shows exactly one Merrill Lynch hire from the competition in calendar year 2018 and over 30 teams departing. (Note: These databases are not perfect because not all moves are reported or sometimes they are just missed.)

When Merrill was aggressively hiring, its favorite targets were, predictably, UBS and Morgan Stanley. Its favorite targets’ advisers are now scared to move. In the meantime, the advisers who have departed represent a diaspora of disparate companies and breakaways. Some of the departures have been amongst the largest ever to leave Merrill. That said, the departures are a tiny fraction of the overall Merrill Lynch adviser population.

So what do I think Merrill Lynch will do? It has obviously noted its own lack of recruiting success and the slowed attrition rates at its competition. It also knows that a large number of UBS and Morgan Stanley advisers are furious at their firm’s decision.

Merrill’s risk if it departs the protocol is a cultural backlash, which could result, ironically, in an increase in attrition. But it also knows that departing the protocol will make it much more difficult for its biggest teams to leave.

The CEO of Bank of America has three different wealth management platforms:

1. U.S. Trust was never a part of the protocol. Its advisers are paid a fraction of what Merrill Lynch advisers are paid (as a percentage of revenue generated by their production).

2. Merrill Edge is Merrill in name only. Bank of America has said that Merrill Edge’s assets under management crossed the $200 billion threshold and has announced plans for dramatic new hiring. Like their counterparts at U.S. Trust, Merrill Edge advisers are paid far less than their Merrill Lynch colleagues and are not covered by the protocol.

3. Merrill Lynch advisers, with benefits, are paid about 50% of the production that they generate. While Merrill Edge is an astonishing growth story, Merrill Lynch advisers have to be incented with the carrot of a payout increase to grow their business and threatened with the stick of a payout cut if they do not grow, or worse, shrink. Without significant recruits or trainees, growth is restricted to anemic “same store sales.” Natural attrition will only grow (reflecting deaths, retirements, compliance, etc.) as the population ages. And some competing firms will continue to attract some of the best in the industry as proven by this year’s departures.

I hypothesize that some of the Merrill Edge advisers will be able to take over many of the older practices within Merrill Lynch. With a profitable “farm team” which is effectively a true training program, Bank of America Merrill Lynch is uniquely positioned to both grow and thrive in a non-protocol world in a way that is the envy of its wirehouse competitors. BofA Merrill can make it harder to leave and still continue growing.

The business case is too strong. I believe that Merrill Lynch will leave the recruiting protocol because it is the wirehouse that is most likely to retain and win market share in a post-protocol world.

(More: Wirehouse advisers: Time to unionize?)

Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.