The Broker Protocol[1] is an agreement among wealth management firms with the goal of preventing costly litigation caused by brokers switching firms.[2] Brokers’ successful client relationships enable wealth management firms to profit from client investment. Consequently, when a broker leaves a firm, the firm is in danger of losing business. Clients who had built up trust with a certain broker want to keep their business with that broker. The brokers also want to maintain an established client base.[3] Thus, brokers try to bring their clients over to their new firm and clients try to stay connected with their broker. Since 2004, the Broker Protocol has allowed for brokers to contact their clients and seamlessly carry them over to the new firm.
Before 2004, that seamless firm switching was not so simple. There was no industry-wide agreement that prevented lawsuits aimed at retaining a departing broker’s clients when the broker left the firm. The litigation that ensued concerned the transfer of client information and essentially the transfer of business.[4] Firms would file temporary restraining orders to impede the brokers’ attempts to contact clients, resulting in legal battles over the brokers’ ability to leave and take clients from the firm by the terms of their employment contracts.[5] The legal theory was that the firms owned the client contact information and brokers’ employment contracts prohibited brokers from taking any of this information if they left a firm. The firms would also not reveal the new location of a broker who left their firm in an effort to retain business.[6] These industry conditions may be viewed as fierce competition, but they also caused excessive inefficiency for firms, brokers, and clients.
The resulting lawsuits were costly and frequent enough that in 2004 Smith Barney (now Morgan Stanley), Merrill Lynch, and UBS, three of the biggest firms,[7] agreed to the Broker Protocol. It is an agreement whereby no firm would sue another over brokers switching firms and taking client contact information with them.[8] This enabled brokers to retain their client base when switching firms, thereby allowing competing firms to benefit from new business without the burden of a lawsuit. Clients also benefited by not having their investment accounts caught up in litigation and potentially having to lose a trusted broker relationship. The protocol, along with technological improvements in the industry, has led to many new firms enjoying the benefits of this agreement and successfully competing against the largest firms.[9] Removing potential litigation allowed for new firms to recruit established professionals in this industry without incurring the high costs that were a natural part of that recruitment. Currently, almost two thousand firms have agreed to the protocol, but three of the biggest have recently withdrawn.[10]
Morgan Stanley became the first firm to withdraw from the protocol towards the end of 2017.[11] This may indicate that the firm has been struggling to retain brokers—by withdrawing from the protocol Morgan Stanley can now return to its litigious pre-protocol practice.[12] This firm has in fact already filed temporary restraining orders to prevent ex-brokers from contacting their clients.[13] However, Morgan Stanley’s departure has been viewed negatively around the industry, which indicates that the protocol probably will not be completely abandoned anytime soon.[14] But as of now, Citibank and UBS have followed Morgan Stanley in withdrawing[15] and UBS has also filed suits against brokers.[16] These legal actions are for temporary restraining orders to once again prevent brokers from taking a firm’s business to a competitor. Despite Morgan Stanley winning four suits, [17]these lawsuits are not having the same effect as they used to. Competing firms know how to successfully recruit without encountering legal obstacles that the protocol can no longer prevent.[18] The problem with the failing lawsuits is that the brokers who leave are strictly following employment contracts that prevent taking client information.[19] Therefore, the withdrawing firms are not truly losing. In fact, Merrill Lynch and Wells Fargo have stated that while they currently have no plans of withdrawing, that would change if more large firms continued to withdraw.[20] It seems that the Broker Protocol has been very good for the industry as a whole but not so much for the companies that created it. Withdrawing is a very defensive move and its ultimate effect will depend on the actions of the largest firms in this industry. If the current litigations do not lead to favorable results for Morgan Stanley and UBS, other firms would be less likely to withdraw. But if more large firms withdraw, more litigation will likely occur over client information as it did before 2004.
However, communicating with clients, and communication in general, has changed significantly since the pre-protocol days. For example, Linkedin launched in 2003, while Facebook only launched[21] in 2004, the year the protocol was created, and the first iPhone was not even sold until 2007. Brokers may now have client connections through social media, which became a dominant form of communication in the thirteen years that firms unwaveringly followed the protocol. Even without social media connections, clients can easily find their brokers as long as their broker has an online presence. Today’s world is thus vastly different than it was in 2004 when there was virtually no way for brokers to contact their clients without using contact information stored in a firm’s database. More importantly, the clients always give the final authority on where their money is being managed and by whom.[22] Although brokers are not allowed to take certain contact information and outright tell their clients to follow them to a new firm, a complete return to the old ways is far from certain and returning to how things used to be may not be so easy.[23]
[1] The text of the Protocol can be accessed with the following link: http://m.bressler.com/DE0ED6/assets/files/Documents/Copy_of_Broker_Protocol.pdf.
[2] See Paul Sullivan, As Big Firms Exit Broker Pact, Investors Are Uneasy, N.Y. Tɪᴍᴇs (Jan. 19, 2018), https://www.nytimes.com/2018/01/19/your-money/broker-protocol.html.
[3] See id.
[4] See id.
[5] See Kitces.ᴄᴏᴍ, Complying With The Broker Protocol When Changing Firms Or Going Independent (Aug. 22, 2016, 7:01 AM), https://www.kitces.com/blog/broker-protocol-recruiting-requirements-for-moving-brokers-to-breakaway-or-go-independent-ria/.
[6] See Danny Sarch, Investors Should Study ‘Broker Protocol’ For Their Protection, CNBC (Dec. 18, 2017, 8:09 AM), https://www.cnbc.com/2017/12/18/investors-should-study-broker-protocol-for-their-protection.html.
[7] See id.
[8] See Sullivan, supra note 2.
[9] See id.
[10] See id.
[11] See Bruce Kelly, Morgan Stanley Dumps Broker Recruiting Protocol, Investment News (Oct. 30, 2017, 11:26 AM), http://www.investmentnews.com/article/20171030/FREE/171039998/morgan-stanley-dumps-broker-recruiting-protocol.
[12] See id.
[13] See Bruce Kelly, Broker Protocol: Indecision Over Recruiting Agreement Is Rampant, Investment News (Feb. 24, 2018, 6:00 AM), http://www.investmentnews.com/article/20180224/FREE/180229961/broker-protocol-indecision-over-recruiting-agreement-is-rampant.
[14] See Kenneth Corbin, How Morgan Stanley’s Ex-Broker Lawsuits Could Backfire, Oɴ Wᴀʟʟ Sᴛreet (Feb. 28, 2018, 3:35 PM), https://onwallstreet.financial-planning.com/news/how-morgan-stanleys-ex-broker-lawsuits-could-backfire.
[15] See Sullivan, supra note 2.
[16] Mark Elzweig, TRO Shakedown Waged By Morgan Stanley And UBS Is Already Unraveling, Oɴ Wᴀʟʟ Sᴛreet (Mar. 6, 2018, 4:14 PM), https://onwallstreet.financial-planning.com/opinion/morgan-stanley-and-ubs-tro-shakedown-is-already-unraveling?tag=0000015b-c546-dd6d-a55f-e75fe7150000.
[17] See id.
[18] See id.
[19] See id.
[20] Mason Braswell, Wells Fargo Commits to Staying in Broker Protocol, Aᴅᴠɪsᴏʀ Hᴜʙ (Feb. 22, 2018), https://advisorhub.com/wells-fargo-commits-staying-broker-protocol/.
[21] Facebook did not become accessible to anyone with an email address until 2006. See Sarah Phillips, A Brief History of Facebook, Gᴜᴀʀᴅɪᴀɴ (July 25, 2007), https://www.theguardian.com/technology/2007/jul/25/media.newmedia.
[22] See Sullivan, supra note 2.
[23] See id.
