Analysis: Smaller Rivals Quake After Morgan Stanley’s Protocol Decision
The registered investment advisory firms, regional firms, private banks and independent broker-dealers that have been flourishing by attracting experienced brokers from wirehouses are shaking in their boots over Morgan Stanley’s exit from the Protocol for Broker Recruiting, according to industry observers.
Much ink has been spilled in recent days on how brokers at Morgan Stanley have lost freedom of movement, but it’s their ability to jump to the independents that is most at risk.
Large competitors such as Merrill Lynch, UBS Financial Services and Wells Fargo Advisors, some or all of which are expected to follow Morgan Stanley’s decisions, will still recruit franchise players and have the resources to go to court to defend their moves. The smaller firms don’t have the wherewithal to engage in legal battles.
“Nobody wants to be on the other side of the legal end of this thing,” said Michael Maurer, a former Smith Barney complex manager who left in 2013 to found independent advisory firm Steward Partners and is now an independent consultant.
The so-called independent channel—a melange of financial planners, brokers and investment managers—have leveraged the Protocol to become the fastest-growing component of the wealth management industry in the past few years. Their leaders and the satellite industry of lawyers and business consultants who work with them are now responding to Morgan Stanley’s decision with a combination of boosterism and defensiveness.
“You have choices, and more flexibility than you may know, and no one can take away a client’s freedom to work with whomever they choose, wherever they choose,” Bob Matthews, the former head of Smith Barney’s retail brokerage, wrote in an “open letter to advisors” posted on Friday on LinkedIn.
Matthews, now chief executive of Fieldpoint Private, said the missive was prompted by calls from brokers in the wealth management firm’s hiring pipeline who were “unnerved” by Morgan Stanley’s announcement and fearful that their own firms would follow. Fieldpoint, which is based in Connecticut, employs about 20 advisors, and its board is laced with former wirehouse executives.
Shirl Penney, chief executive of Dynasty Financial Partners, which sells trading and business services to brokers setting up as independents, went so far as to claim that escaping from the Protocol is all but unpatriotic.
“Americans tend to react strongly when they sense that their freedom of choice is being restricted, especially when it comes to their financial freedom and the advice they receive on it,” the former head of private wealth management at Smith Barney wrote in Josh Brown’s widely read blog, The Reformed Broker, urging advisors to stand up and take action.
“Some firms seem to be losing sight of what is in the best interest of those individuals that our industry was set up to serve: the end client. Educate yourself and determine your next steps before it is too late.”
Elliot Weissbluth, the founder of HighTower Advisors, which was formed to attract wirehouse advisors to independence, proclaimed on his Twitter feed: “MS has given up on idea its biz model can attract advisers on merit. Will now try to intimidate them into staying.”
But executives, brokers and recruiters also conceded that Morgan Stanley Chairman James Gorman is clear-headed about his decision to pull out of a pact that has become a one-way street for small competitors to peck at big firms.
Even if it means losing a few score of his 16,000 brokers and darkening esprit de corps, exiting the Protocol will help the firm retain big producers at a time when Gorman has told shareholders he will keep a lid on recruiting and training costs at the wealth business that provides 40-50% of the bank’s revenue.
“James is making a really smart statistical bet that there will be a flurry [of departures], but your attrition will go from 400 people a year to something like 75 people,” said Matthews. “I would bet that most institutional shareholders think that the freedom for advisors to move is a negative and a reason to punish the stock.”
Another former wirehouse executive was less generous.
“My personal attitude is you ought to build an organization where people want to stay,” said John ‘Launny’ Steffens, a former chairman of Merrill Lynch’s U.S. private client group whose Spring Mountain Capital asset management firm now sells funds through regional and independent firms. “It’s pretty hard to keep the client happy without keeping the brokers happy.”
Morgan Stanley’s withdrawal from the Protocol means it can take brokers to court and to arbitration to prevent them from leaving with client-contact information. The firm also has told advisors it will enforce any non-solicit clauses in their employment contracts. Firms in the Protocol allow brokers to leave with rudimentary client information without fear of legal reprisal.
Some of the smaller players that last week rushed to recruit brokers out of Morgan Stanley before the withdrawal became effective on Friday, are now marking time as they evaluate how fiercely the firm will defend its turf.
“Everyone has taken a wait-and-see attitude until the legal precedent is set,” said John Pierce, head of recruiting at Stifel Nicolaus.