Jump Now or Boil Slowly

What is “The Protocol”?

A few years ago, at the height of the broker recruiting wars, the wirehouses got together and decided to put a stop to the rampant lawsuits betwixt and between themselves every time a team left one firm to move to another. Every day, after all, a Morgan Stanley broker was heading to UBS in one part of the country, while in another part of the country, UBS was losing a rep to Morgan Stanley. Merrill people went to Wells Fargo, Wells Fargo people went to Raymond James, Ray Jay folks joined Barclays and on and on. If there was a cease and desist or a lawsuit every time, no one would win.

I used to call this sort of thing the “prisoner exchange,” although the Protocol calmed things down somewhat. But not everyone is happy with the result of this tacit cooperation…

At the heart of the issue is the question of who “owns” the client – the advisor or the firm? By own, of course, I’m referring to the relationship – is the client there because he or she likes the advisor, or only because of the services and the brand name of the firm? No way to answer this question, so in the absence of answers the two parties just assume that they own the relationship, the accounts, the data and the right to service them into the future.

Last week Morgan Stanley, the largest brokerage firm by headcount, announced that they were opting out of the Protocol as of today. The firm’s contention is that there is too much gamesmanship being played, especially by smaller firms and RIAs who are getting a lot more than they’re giving every time they recruit one of its teams away. It sent the industry into an uproar and sparked a few last minute defections.

Today you’re in for a treat…

My friend Shirl Penney is the founder of Dynasty Financial Partners, the leading platform for breakaway brokerage teams who want to set up their own RIAs without the exorbitant costs and efforts associated with building out their own back office. Dynasty provides everything from technology to compliance to legal advice to real estate expertise to investment solutions to that an entrepreneurial brokerage team can hang their own shingle and be up and running on day one.

Shirl has a strong opinion about what the dissolution of the Protocol will mean for advisors and their freedom, as well as the freedom of choice that the advisors’ clients deserve. This is a strong take, I highly suggest you read it. – Josh


Jump Now Or Boil Slowly

I was recently at dinner with my wife and a group of friends and, as is often the case in social settings, the conversation turned to updates on everyone’s careers.  When it was my turn to share, we began discussing some of the recent RIAs that we have launched with advisors that previously worked at wirehouses.  The group was fascinated by the planning work that goes into launching one of these new firms, the cloak and dagger nature of it. 

As we continued to discuss the process, expanding on why we need a 150 step transition plan at Dynasty to launch breakaway advisor RIAs and how the advisor’s clients are often treated during the process, something interesting happened.  Everyone in the group got angry.  Really angry!  “How can these firms claim that the client is theirs and not the advisor’s, who have built their client relationships up over years of hard work?  How can their friends in the same office call on their clients and try to steal them when they are in the same business?  How can their previous employer get in the way and make it difficult for their clients to continue to work with the advisor?  Why is that allowed and how is that in the best interest of the client?”  The outrage went on and on until someone said, “It’s no wonder so many Americans have lost faith and trust in our financial firms that serve us.” 

Go ahead and try to explain broker protocol to people not in our wealth management industry and see what happens.   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.

Now ironically, as I write this on Friday, November 3rd, just a month after that dinner, we have one of the major wirehouses leaving broker protocol and it is likely that others will follow.  The thinking, of course, is to make it even harder still for advisors at these firms to leave, to further constrict their choice and that of their clients.  The longer term effects here will be interesting to watch because leadership based on fear, as opposed to inspiration, tends to fragment over time.  Advisors will likely find the coming days to be filled with compensation plan changes as they slowly get turned into relationship managers covering the “firm’s” clients.  Changes to salary and bonus programs are not too far out.  

The reality is that it’s very difficult to juggle multiple constituencies at these large brokerages.  Do you advocate for advisors, clients, employees, management, product partners, proprietary product offerings or shareholders?  How do you prioritize these groups?  Boards of directors report to shareholders and management reports to the board.  It’s not complicated.   So as these firms find more ways to monetize the client relationship without paying the advisors, soon to be relationship managers, (spreads on cash, loans, underwriting fees, asset management distribution fees, minimum account fees, administrative fees, etc.) the advisor will find himself or herself living out the parable of the boiling frog.  The water temperature is slowly rising around them in such a way so as to not fully alarm them of the macro goal to cook them, but rather in a way designed to lull them into complacency so that by the time they wake up to what’s going on, it’s too late.  

Some advisors will stay fully aware of their role in this changing environment and there is nothing wrong with that if they knowingly stay.  Others will be too scared to change, to move, to act on what they know is best for their clients.  This is unfortunate, but it is of course what the wirehouses hope will happen with much of their advisor employee base.  However, a growing number of advisors will stand up and take action.  They will move to an environment that they feel is better for their clients, their employees, their families.  That action may include joining another firm that better aligns with their values, or perhaps launching their own firm in the independent space.  As Plato described in his Allegory of the Cave, even after seeing the light and realizing that there is a better reality, many people choose not to change because they are accustomed to their current reality.  Whether we admit it or not, choosing to do nothing is in fact a choice that we make.

One thing that might end up being underestimated by the wirehouses who leave the broker protocol is that the end client of today is very different in their understanding of our industry as compared to the end client pre-financial crisis, when the broker protocol was first put into place.  Today, clients understand much more about the benefits of getting their advice separate from where products are manufactured and sold.  In the current landscape, you have RIA custodians like Schwab, with over $1.5 trillion in RIA assets, who have a larger asset base than some wirehouses.  Other RIA custodians, like Fidelity and Pershing, are not far behind. 

There is also an influx of capital and technological resources flooding into the RIA space, in addition to product access now being just about universal in the industry.  The result of this is that an accelerating number of Americans are now recipients of independent advice and are talking to their friends about it.  The breakaway client movement is now as strong as the breakaway advisor movement.  As clients come to understand how wirehouse advisors have to protect them from their employers, and have less choice in their ability to move when they feel it’s in their clients’ best interest to do so, these clients will react even more strongly in choosing independence.

The path forward in light of this dizzying array of changes in wealth management is for advisors and clients to educate themselves on why firms are making these types of decisions and what it means for the advisors and their clients.  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. 

The water is getting hotter.


Well done, Shirl.

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