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Why a Truce on Broker Poaching Is Being Broken: QuickTake Q&A


When financial advisers jump from one firm to another, big chunks of client assets usually follow. For years, banks used legal actions to try to block departing advisers from taking clients -- and their money -- with them. Large banks called a truce in 2004. Their agreement, the Protocol for Broker Recruiting, allows advisers to change companies and woo former clients without legal blowback. More than 1,600 firms have signed onto the three-page protocol. Now Morgan Stanley is pulling out, raising questions about whether the agreement is unraveling.

1. What does the protocol do?

It spells out what firm-switching investment advisers can and can’t do to receive a waiver from the non-solicitation agreements that are common in the industry. When advisers jump between protocol-member firms, they’re free to ask clients to come with them. The catch: An adviser can walk out only with client names, addresses, phone numbers, email addresses and account titles -- no "other documents or information."

2. Why is Morgan Stanley abandoning this arrangement?

The company said the protocol has become “replete with opportunities for gamesmanship and loopholes” that render it “no longer sustainable.” Among Morgan Stanley’s complaints: firms "opportunistically" joining the protocol to make "a strategic hire," then dropping out; and firms "unilaterally" making exceptions to the protocol’s scope.

3. Who’s gaming the system?

One firm that has raised hackles is JPMorgan Chase & Co., one of a dozen or so protocol members that have filed lawsuits to stop brokers departing one of their units from invoking protocol protections. At the same time, these firms claim that other units of theirs are free, under the protocol, to hire whomever they want from competitors.

4. What led to the breaking point?

Hundreds of advisers have tapped the protocol for a purpose that wasn’t originally intended: to go out on their own. They do so by, first, getting someone to set up a registered investment-advisory firm that joins the protocol, then leaving their jobs to take control of the new firm, and finally using the protocol’s protections to recruit their own clients. Some financial advisers ("registered reps," in industry lingo) have used that strategy to leave big firms with billions of dollars in client assets in tow.

5. Could banks address problems by amending the protocol?

That wouldn’t be easy. The protocol is a contractual agreement among those who sign it, and there’s no formal governing body. The three original drafters -- Merrill Lynch & Co., Citigroup Inc. and UBS Group AG -- managed to agree on terms. Getting the 1,600-plus current signatories to agree on amendments could prove hopelessly divisive and complex.

6. Are other banks likely to follow Morgan Stanley out the door?

Hard to say. Firms that are looking to recruit advisers have an incentive to stay, as long as their rivals do too. On the other hand, if big banks decide that the protocol is making it too easy for break-away advisers to go independent, they may decide to pull out. The big-name, old-school banks that started the protocol have been steadily losing market share to independent upstart firms.

7. What happens if the protocol collapses?

The industry has talked about the need for a Protocol 2.0 for some time, but no consensus has emerged about what it would look like. Large banks could try to draft a new agreement among themselves, but they would have to tread carefully to avoid running afoul of antitrust laws. It’s also possible the Securities and Exchange Commission could update its Regulation S-P, which governs client data privacy, to clarify what advisers can and can’t take with them when changing firms. If big firms were to abandon the protocol en masse, advisers in some states, like California, would probably look to state-enforced restrictions on non-solicitation agreements to take its place.

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