Morgan Stanley to Pull Out of Recruiting Pact with Rival Firms
(Clarifies in 7th paragraph that firm’s exit from the Protocol is effective on Friday morning, not end of day.)
Morgan Stanley said Monday that it is dropping out of the Protocol for Broker Recruiting that large firms signed more than a decade ago, underscoring what it calls its “commitment” to spend money on retaining experienced brokers and training new ones rather than hiring them from rivals.
The Protocol was a revolutionary attempt by Merrill Lynch, Smith Barney and UBS Financial Services in 2004 to reduce litigation costs created by attempts to prevent brokers from calling their former clients. (Morgan Stanley joined the inter-industry pact in October 2006.) It allows brokers to move with five rudimentary pieces of client contact information after giving notice to their managers.
The Protocol has lost its protective punch for the big firms in recent years as more than 1,600 small broker-dealers and registered investment advisory firms have become signatories, allowing them to recruit from the bigger firms without fear of reprisal.
“[O]ver time the Protocol has become replete with opportunities for gamesmanship and loopholes,” Morgan Stanley said in a news release.
“[F]irms have opportunistically joined the Protocol to make a strategic hire and then dropped out; firms have invoked the benefits of the Protocol when hiring while using non-Protocol affiliates to circumvent the Protocol when they lose talent; and firms have unilaterally made exceptions to the scope of the Protocol, undermining the objective of a universal set of rules. In its current state the Protocol is no longer sustainable.”
The exit will allow Morgan Stanley “to invest more heavily in its world-class advisors and their teams, helping drive additional growth opportunities,” the press release said.
Morgan Stanley told managers on a conference call on Monday that the exit will become effective at the start of the day this Friday. Thereafter, any advisor jumping to another firm will be subject to a one-year non-solicitation ban.
“Morgan is taking the view that there is nowhere to go, and that’s not true,” said a 30-year veteran of the firm and its predecessors who spoke on condition of anonymity. “I think if it takes effect on Friday, you’ll see a lot of people leave [by] Friday.”
Rivals, to be sure, can’t hire brokers without doing weeks of due diligence on their production, compliance records and demeanor, said a complex manager at a large regional firm that has become a more aggressive recruiter as wirehouses pull back. “Unless they have been in the pipeline, any deal we offered would have to be heavily hair-cutted,” said the manager, who spoke on condition of anonymity.
The big question, according to recruiters and competitors, will be whether other large firms will follow Morgan Stanley, and whether it will bare its teeth by actually bringing lawsuits.
“it’s likely a matter of time before the other major players do the same,” said Louis Diamond, a vice president at Diamond Consultants, a recruiting firm for brokers.
The New York-based company and UBS, Wells Fargo Advisors and Merrill Lynch in recent months have become more aggressive in seeking court-imposed restraining orders to prevent brokers from contacting former clients by alleging that they were violating Protocol rules. The legal actions complement their decisions to pare back expensive recruiting efforts and also give managers and remaining brokers more time to try to convince their departing colleagues’ clients to stay rather than to follow their broker to a new firm.
Morgan Stanley’s decision to walk away from the pact may be mere saber-rattling, aimed at intimidating brokers concerned about the details of restarting their practices at another firm with threats of legal action, said some recruiters. But other recruiters, brokers and consultants said the effect on brokers’ mobility could be severe.
“It’s going to increase the amount of litigation and arbitration around the Street,” said Ross Intelisano, a plaintiffs’ lawyer at Rich, Intelisano & Katz in New York, who often represents brokers and customers suing broker-dealers.
Morgan Stanley’s size—its 15,700 brokers comprise the largest salesforce in the retail brokerage industry—and the consequences of its purchase of Smith Barney made it ripe to be a first mover in breaking out of the Protocol, several observers said.
The retention bonuses it gave to thousands of Smith Barney brokers in the form of forgivable loans, along with related promissory notes obligating brokers to repay unamortized balances if they leave before the loans mature, are poised to expire over the next few months. Removing that payback restraint likely worried Morgan Stanley at a time when its brokerage force has been contracting.
Without the protection of the Protocol, Morgan Stanley is betting that fewer brokers will leave.
Tells me Morgan is losing more advisors than they’re hiring, and they’re trying to stop the outflow. This has nothing to do with spending money on retaining advisors.
Ole Jimmy Gorman strikes back!
looks like im never getting out of here
You should have already gotten out….but it is not too late, I assure you. I just did after 30 years and my income has tripled. Best move ever. MS is a bottom feeder and will eat anything in it’s way.
Avoid the frying pan to the fire by going to another wire house who doesn’t care about advisors if they don’t have a B in front of their assets under management or clients who don’t have at least 6 figures…7 is better.
Sorry, I meant clients with 7 figures and 8 is better.
Merrill is next, expect terminally boring Moynihan to come with an announcement. He’s incapable of an original thought and always second, never leads. Recent statements about the importance of Merrill and moving dead wood Keith Banks out of the way in favor of a business banker to lead UST zombies telegraphs he’ll do whatever it takes to stem the arterial wound at Mother Merrill.
Let me see–by making it harder for advisers to LEAVE doesn’t it mean that Morgan Stanley needs to spend LESS money on retaining advisors?
WITH THAT SAID, however, when Wells Fargo Advisors fired me, I had zero information on my clients. no names, no phone numbers, no e-mails, no NOTHING except what I could remember. Yet, CLIENTS tracked me down and in the end nearly all of them not only found me–but joined me. So, for those of you that are at firms without the Protocol agreement-you can still leave as long as you have DEEP relationships with your clients. SO–I am not sure the loss of the Protocol agreement is that significant.
WHAT I THINK might be a bigger deal, however, is the non-solicition ban.
Does that SIMPLY mean the FA can NOT contact the client? Can the CLIENT track down their advisor and be allowed to transfer their assets to their advisor? If that is the case, it is a bit less simple as in my case, once the client had tracked ME DOWN–I could explain to them what happened, give them my side of the story, and the client could then make an informed decision.
QUESTION: Does anyone know if the “non-solicition ban” applies IF THE CLIENT tracks down the advisor FIRST?
before Protocol, TRO only stood against FA contacting any clients they had not already contacted or spoke to. If a client calls the advisor they are not prohibited from talking to the client. A firm can not tell a client where they can or can not have their money, or who they can work with. Good luck with this holding up in court in this environment.
A non-solicitation is as reads. It does not prevent you contacting the client and simply explaining that you left the firm. You can answer their questions. If they want to meet, you can meet. If they want to transfer, you can have them sign the forms.
I agree with ONCE A BULL. This is a very weak sign by MS. If they want to retain advisors they should work on their culture, technology etc. like all the indy’s and regional’s that are eating their lunch.
Agree with your observation, but rest assured management/legal at the old firm will “interrogate” clients during phone calls and if said clients give any response that even hints that there was solicitation on the part of their former broker, litigation will ensue. The threat and expense of that alone will be enough to deter most FAs.
“as long as you have DEEP relationships with your clients” – fully agree. This is an additional reason for Advisors to use social media…. and for big firms to restrict the use of social media by advisors ;-).
Networking brings independence and freedom !
The client does not have an exclusive contract with the firm, the broker does. Do NOT contact your clients, but when they do contact you, be sure you send them a “Thank for having contacted me” letter. That seals up the fact you DID NOT solicited them. If you have been their broker thru many years and your relationship and track record is good, they will find you!! Sometimes it takes a year or two, but it can be done!!
I predict that the other wires will follow. Protocol is dead. Protocol clearly enables breakaway Advisors and makes their task of moving clients and assets much easier. But the reason that there are Breakaways in the first place is because the wires are ripping off both clients and Advisors and many Advisors are smart enough to recognize this. MS may be able to slow the outflow for now, but no intelligent person would choose to move into MS knowing that it is a one way trap into a firm that will never allow someone to leave. It’s their Book, not yours.
This should come as a surprise to no one. It’s the next logical step as the firm continues its _stated_ goal of adopting the European brokerage model, where the firm owns the clients, the majority of the advisers are on salary, and there are only a small percentage of true rainmaker producers. Now that the stable doors are closed, Gorman & Co. can really begin turning the screws on compensation, as advisors will have no choice but to endure the pain. Do you think it’s coincidence that the retention notes from 2009 mature at the end of this year?
It breaks my heart for the many fine advisors that are now trapped there. Fortunately I left earlier this year. I have so many friends there that hate the firm, but are excellent advisors that didn’t want the hassle or risk of moving their practice. It’s only going to get worse my friends. Much much worse.
Gorman called the bluff of the entire industry. All have known huge deals crushed margins and were not sustainable. After many years of the beautiful (for FA’s) madness the wirehouses ended up in this interim no-man’s land they are in now. Gorman realized MS FA’s had few viable options within the industry so he saw the opportunity by bringing back the day of the TRO and the fight that follows the departure of an FA.
While he says MS won’t focus on recruiting I believe this move will result in the re-emergence of deals but at much lower levels, incrementally and slowly at first. The wires have to grow and they aren’t, they’re bleeding. Try as they might to onboard highly qualified trainee candidates, it takes years for the investment to be recouped on those that actually survive. Shareholders think quarter to quarter, not in terms of years.
Gorman is daring FA’s to go independent and betting on them not having the cash flow or balls to do it. Remember, he’s a McKinsey guy and wired this way.
to “once a bull”–you make a good point. I think you are right. I remember talking to Mr. Gorman twice (when he thought he could recruit me back in 2010 and again in 2013) and I think you are point-on in your analysis.
He is the most Machiavellian of his peers–not an indictment, just a fact. Back-to-back announcements, the first cutting comp and the second pulling out of the Protocol. He reminds me of Michael Corleone in the baptism scene of ‘The Godfather’ while all his enemies are being gunned down across the city. Afterwards he says, “Today we settled all family business.” I get the sense Gorman feels the same way today.
I’ve had the opportunity to speak personally with many of you that read this publication, and electronically corresponded with many thousands more. I am not reveling in a self-congratulatory aura of “I told you so” today, but those who follow me know that I predicted this very event back in late July. The first phase of this orchestrated action (which I also publicly predicted) was the cutting back on the big transition bonuses. While not quite the seventh sign of the Apocalypse, these are industry transformative events. The third phase will be a needle-moving change on broker compensation, which I predict will begin trending downward in 2019 and will be accompanied by pressure on employee advisors to accept a salary + modest override as compensation. There’s still some hope, but not much time. R. Edde
Ron, seriously? If you were predicting this in July you were late to the party. We’ve seen this coming for years pal.
agreed, Ron your crystal ball needs a windex treatment
Jeremiah, I said “publicly”. It’s one thing to speculate over a glass of scotch at the hotel bar. It’s another to go on public record in print media.
Ron, FA’s still want to move. Given the carnage in the wirehouses do you see a back to the future return to the old days? A reset on deals (smaller) and ugly departures with legal mud wrestling. Advisors simply have more options–Raymond James is crushing it, emergence of a strong regional players and independents. Even operate in a RIA/BD hybrid model and hang the shingle. Seems to me that perhaps this is the new normal. Your thoughts?
Those of us actually inside the industry talk about it openly in the boardroom. Bravo to you.
I have said it before and I will say it again, why stay at a wirehouse? If you are a wirehouse producer and only 50% of your assets move with you to an independent firm or to an RIA, you will still make the same amount of money as what you did at the wire and the sense of freedom you gain is worth twice that much. Morgan Stanley made it more difficult for an advisor to leave, but not impossible. Ed Jones advisors have been under a 1 year non-solicit for as long as I remember but yet their advisors leave all the time. Your clients will track you down, if you have any type of relationship with them. You are still allowed to advertise, you are still allowed to market yourself, you are still allowed to update your profile on LinkedIn.
We aren’t allowed to use the word “guarantee” in this industry but I do GUARANTEE you that Morg Stanley is going to be cutting compensation and tightening the screws on their advisors now that they have left protocol. Like others have said on this thread, they assume that the advisors won’t leave now that they are truly “captive”. I hope thousands vote with their feet and prove them wrong.
I’d like nothing better…but that is an admittedly self-serving statement. Of course, I am hoping that they will call me when they do it. Regardless, it just got much harder to do and firms are prepping to put a lot more mines in the minefield.
ANOTHER ANGLE ON THIS–the wealthy–the REALLY wealthy–are in a ‘club’–they know each other. They talk to each other. They met each other at meetings of non-profits. At the Walter Cronkite School of Journalism a few weeks ago I was introduced to one of their LARGEST donors. He told me it has been wise of me to ‘leave’ that ‘big bank’ brokerage firm. I corrected him–saying ‘well, they fired me”…His wife’s response was “they were scared of you”…..The husband then said–and this is his exact words: “We had our foundation with the same broker for 25 years–first when he was at Smith Barney and then later at Wells Fargo. But, back in 2016 we decided we had read ‘too much’ about ‘all the big banks’. So, we took all our accounts out and moved the foundation’s assets to an independent here in town. It has been around over 5 decades–so, it is old enough for us. We just don’t want ANYTHING to do with those BIG BANKS anymore”. These are THEIR WORDS not mine.
So, FAs at MS (and probably soon to be the other big firms) can still leave–and need to realize that GETTING NEW ACCOUNTS is as important as KEEPING your current accounts. Think of it this way–if you stay out of fear –your ability to gain new relationships could be hurt considerably.
Meanwhile–if you LEAVE–the clients that value you will search you out–so, NO NEED to ‘soliciate them’..let them come to you.
Meanwhile–you may find (as I have found) that the larger clients WANT OUT of those “big banks” and will decide to work with you when you are no longer with the “too big to manage and too big to regulate” Bank-owned ‘everything’ ..and you DEVELOP a whole bunch of new client relationships that can quickly replace any client that doesn’t bother to find you at your new firm.
One may want to view this from the “how do I get new accounts” side of the ‘coin’ rather than just the “current client side of the coin”. Clients can leave anything they want–and all the press reports on fraud and firings and violations of banking rules and regulations-has been an ongoing saga for so long that CLIENTS are starting to TAKE ACTION. So..Call a really experienced lawyer–get good solid advice on exactly what you can and can not do–you do not want to take any shortcuts or ‘assume’ anything!—-then, make an informed LONG RANGE CAREER decision that is RIGHT for you –and is RIGHT for your CLIENTS.
Remember, the only reason I left Thomson McKinnon Securities in 1988 was because it was clear to me (from reading their financial statements) that they were going to go bankrupt. I did not want my CLIENTS impacted in any way from a BQY brokerage firm (SIPC took care of the clients in BQY situations but still-it scares them). So, I searched out a firm that I felt was right for me (I told my BOM I was searching for another firm in December of 1987 and told him why–and then left 3/14/1988) and LEFT. Doing what is right for the CLIENTS often is the right path. So, add ‘what the clients think’ to the equation when you are making your decisions regarding stay/go…
just some food for thought
Ron, FA’s still want to move. Given the carnage in the wirehouses do you see a back to the future return to the old days? A reset on deals (smaller) and ugly departures with legal mud wrestling. Advisors simply have more options–Raymond James is crushing it, emergence of a strong regional players and independents. Even operate in a RIA/BD hybrid model and hang the shingle. Seems to me that perhaps this is the new normal. Your thoughts?
Once a bull, you are accurate on several fronts there. It will still be possible to move, but much riskier and complex now. My job just got far more challenging…but my job security just improved!
I know times have been confusing for you–all of us. Best wishes with that! Go score!
I left a firm that was not part of the protocol, endured a 60 day garden leave and a two year non-solicit. The majority of my clients found me and moved. MS cannot dictate whom clients can work with. In my view this won’t help and if they lower comp and others don’t many will jump ship anyway. As I always say, locking the doors didn’t work in Russia and it doesn’t work on Wall Street either. It’s pretty pathetic that this is all that they can do to keep the FA’s from leaving.
Mark Horowitz! WAY TO GO!! Great job! Great commentary!!
This is the beginning of the end for Morgan Stanley.
and how is this in the best interest of the client??? keeping a client from the advisor that they have worked with for years? Doesnt sound too fiduciary to me!
This is my point exactly. I don’t think this will hold up in court. An FA is free to tell their clients that they’ve left their old firm. When the client asks “oh, that’s good for you. Where did you go and can I come with you?” The advisor is free to do and say whatever she/he wants. The other big issue that will blow these up in court is the fact every advisor that’s moved between 2004 and now, under the protocol world, will be able to make the case that they were given assurances, should they leave, they would not be subject to a TRO. Imposes this type of restriction now, after the fact, would mean they misrepresented themselves to the advisor, who btw, moved under protocol. Sorry Gorman, I’m afraid that ship has already sailed….. you’ll need to think of another strategy to prevent the mass exisdus about hit you when the retention deals roll off early next year.
In a couple of days Merrill Lynch will announce their pathetic compensation plan…how much suffering to those masochist FA’S can endure? Ml is the next one to leave the protocol…remember this post guys.
Future advisor hub headline “Advisor Flee Morgan Stanley on Black Thursday” before MS exits the protocol on Friday.
yes–my guess is the other ‘big 3’ will follow quickly no that MS had left the protocol/
Management shooting holes in the lifeboats on the Titanic. Seems so clear to me. What can they be thinking?
The wirehouses are all run by Merrill people and their “consultants”. They are only interested in their aggregate business and have little to no regard for the advisor-client relationship. At the complex level, non-business people are running the day to day. The compliance departments are aggressive, unprofessional, overzealous and none of the business people are able to make any type of decision. The client calls from compliance and management start as soon as the recruiting deals expire. Coincidence? I think not. It’s as though, through withdrawing from protocol, MS would rather pay lawyers instead of “investing” in their financial advisors. Instead of trying to actually help advisors do business, they’d rather hurt them if they leave.
So glad I escaped when I did. Everything, and I do mean everything, is better on the other side. There is life after MS. (I do still miss the old Smith Barney. That was a great firm. This one is much like that which is probably why I feel good about being here.)
What about those advisors who signed deals that still have many years to go? They signed a promissory note, but removing protocol is a pretty big change.