Is the Broker Protocol Collapsing?

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As many are aware, the Broker Protocol is an agreement among many financial institutions that sets forth the rights that a departing broker/investment advisor has in connection with his/her departure from a Broker Protocol member firm with respect to certain client information in order to, among other things, contact clients and attempt to move the client over to the advisor’s new firm.

The primary purpose in establishing the Broker Protocol was to potentially avoid protracted and costly litigation associated with an advisor’s entitlement to, and ability to move the advisor’s clients to a new firm.   On the flip side, the Broker Protocol had the effect of allowing acquisitive firms to dive headlong into poaching advisors from other firms without the fear of ensuing litigation. On account of the Broker Protocol, the amount of non-compete/non-solicit litigation involving advisor departures has decreased dramatically in the past 15 years.

The Broker Protocol was established in 2004 by Smith Barney (n/k/a Morgan Stanley), Merrill Lynch and UBS in order to create a set of guidelines that firms and advisors must follow when an advisor is moving from one firm to another.  Today, there are over 1500 members of the Broker Protocol. Also at issue at this time was the SEC’s implementation of Regulation S-P, which placed requirements on firms to protect the privacy of client information.  Thus, prior to the establishment of the Broker Protocol, a departing advisor loaded with client information could find herself subject to a breach of contract lawsuit as well as potential regulatory sanctions for the mishandling of private client information.  As a result of the volume of litigation as well as the potential regulatory issues created for advisors on account of Reg S-P, the Broker Protocol was designed to create a well-defined path for a departing advisor to take certain information from the old firm without having the effect of causing a breach of an employment contract as well as in a manner that would not be in violation of Reg S-P.

In recent months, both Morgan Stanley and UBS have withdrawn from the Broker Protocol and many pundits have opined that the departure of two of the original and largest members of the Broker Protocol may have the effect of planting the first seeds to the Broker Protocol’s eventual demise.  Although Merrill Lynch announced earlier this year that it intended to remain a member of the Broker Protocol, some pundits have speculated that it may be delaying the timing of its announcement to avoid any appearance of collusion between itself, Morgan Stanley and UBS.

How Does the Broker Protocol Work?

Under the Broker Protocol, an advisor is only permitted to take the following client account information: client name, address, phone number, email address, and account title of the clients he/she served while working for the old firm (“Client Information”).  The advisor is also required to deliver a written resignation letter to his/her branch manager along with the specific client information that the advisor intends to take.  In accordance with Reg S-P, the advisor’s new firm (which also must be a member of the Broker Protocol) must agree to “limit the use of the Client Information to the solicitation by the [advisor] of his or her former clients and will not permit the use of the Client Information by any other [advisor] or for any other purpose. If a former client indicates to the new firm that he/she would like the prior firm to provide account number(s) and/or account information to the new firm, the former client will be asked to sign a standardized form authorizing the release of the account number(s) and/or account information to the new firm before any such account number(s) or account information are provided.”

“The prior firm will forward to the new firm the client’s account number(s) and/or most recent account statement(s) or information concerning the account’s current positions within one business day, if possible, but, in any event, within two business days, of its receipt of the signed authorization. This information will be transmitted electronically or by fax, and the requests will be processed by the central back office rather than the branch where the [advisor] was employed. A client who wants to transfer his/her account need only sign an ACAT form.”   Broker Protocol, Carlisle Patchen & Murphy, LLP

What May Be the Effect of the Withdrawal of Morgan Stanley and UBS from the Broker Protocol?

So, does UBS and Morgan Stanley’s departure signify the return of aggressive litigation strategies designed to make advisor departures more difficult or impossible?  It is really too soon to tell.  Each has come out publicly stating that growing their respective advisor network organically will become a renewed focus with less focus on poaching advisors from other large firms.  However, with a renewed focus on developing new advisors, such advisors could be trapped contractually with strong contract language, including: (i) stronger provisions regarding the ultimate “ownership” of the client; (ii) creating a more team-approached view to client service where sharing client ownership becomes more mandatory – thereby making it more difficult for an advisor to individually leave with clients; (iii) clarifications that clients referred to an advisor from a retail branch are clients of the firm and not that advisor; and (iv) having reasonable scope non-solicit/non-compete provisions that may stand up in court given current case law.  Furthermore, as former members of the Broker Protocol, both UBS and Morgan Stanley are now free to use litigation as a tactic to hinder an advisor’s ability to jump to another firm.

With respect to the last point regarding non-compete/non-solicit provisions, although courts look at the reasonableness and scope of such provisions, all advisors generally know that having to sit on the sidelines for, by way of example, six months could have a devastating effect on an advisor’s ability to retain the client relationship when the old firm has a six-month head start to try and keep the client relationship in-house.  Although reasonable “garden leave” provisions have generally been held enforceable in the financial services industry, these restrictions are much more common in the trading and institutional asset management sectors where a senior finance professional could use proprietary information to immediately compete with the former institution.

The relationship and servicing of retail advisory clients, however, is much more personal and unique.  For example, what if a long-time client dies when an advisor is on “garden leave” and the family looks to their trusted advisor to help sort through the quagmire of issues associated with the deceased client’s portfolio – only to find that the advisor is prohibited from providing service to them because he/she is in contractual limbo?  This could ultimately cause harm to the client, which is entirely inconsistent with one of the main goals of both the SEC and FINRA – namely to protect the client.  I assume that if the flow of litigation ensues from large firms’ departures from the Broker Protocol, issues such as this one will be at the forefront.  Further, given the potential for harm to the client, it is not unreasonable to assume that the SEC and/or FINRA will weigh in on this issue.

Also at issue are the advisor/broker agreements currently in place for existing wirehouse advisors.  From my review of some of these agreements, the non-compete/non-solicit provisions are tailored with the Broker Protocol in mind.  Namely, if a client is on an advisor’s client sheet as the “primary producer,” such clients would be considered the departing advisor’s clients available for him/her to contact upon departure.  What is not known is how firms that depart from the Broker Protocol will react when an advisor attempts to depart notwithstanding the contractual language discussed above?  In the alternative, these firms may require their existing advisors to execute new agreements that have much more onerous language regarding departure if such firms’ intention is to make advisor departure prohibitive.  Further, these firms may use financial leverage (as was the norm in the mid-to-late 2000s) to lock up advisors with retention bonuses and forgivable loan packages to further tie them to their desks at their current firm.


If a large financial institution’s primary goal is to maintain and grow revenue and profitability (which is not a bad goal . . .), then locking up advisors and their associated revenue is somewhat justified given the resources and investment that the firm may have dedicated to the advisor’s wealth practice.  However, retail investment advisory client relationships are unique and, often times, very personal.  An advisor may have a client relationship that lasts from “cradle to grave” where the advisor is present at a lot of the client’s family milestone events like graduations, bar mitzvahs, weddings and funerals.

Accordingly, client relationship disruptions caused by contractual wrangling only serve to injure the end client and prohibit the advisor from carrying out his/her most important duty to the client – acting as a fiduciary.  As a result, the Broker Protocol indirectly serves and should continue to serve a noble purpose – allowing for orderly advisor transition so that the client needs are ultimately served.

Hayden Royal is a full service RIA firm designed to empower independent wealth advisors to spend more time providing investment advice to their clients, more time developing new business, and less time focused on operations.


Contact: Dale Boettcher
Director of Business Development
c: 727.300.9030 (confidential direct)
o: 704.919.4019
e: [email protected]

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