Personal Finance

These changes could disrupt your relationship with your financial advisor

Key Points
  • Morgan Stanley and UBS have dropped out of the protocol for broker recruiting.
  • The protocol is an agreement between financial firms that sets a standard for how much client information a financial advisor can take when switching firms.
  • A Raymond James executive urges clients to ask firms to let their financial information follow their advisor if they plan to continue that relationship.
Xavier Bonghi | Getty Images

Changes to an agreement among financial firms could have a big impact on your relationship with your financial advisor.

The agreement, known as the protocol for broker recruiting, is under siege. That means communication lapses when your advisor switches firms could become more common.

Established in 2004, the agreement is aimed at helping smooth a financial advisor's transition from one firm to another amid a fierce competition for talent. The protocol sets standards as to how much client information an advisor can take with them when they transition, with the idea that it paves the way for less litigation between firms.

But a couple of large Wall Street firms have recently pulled out of the agreement, creating new complications for advisors and their clients.

Firm participation

Morgan Stanley was the first to pull the plug on its participation in the protocol. In late October, the firm announced its decision to pull out of the agreement, which it said had become "replete with opportunities for gamesmanship and loopholes" as other firms allegedly bent the rules.

"In its current state the protocol is no longer sustainable," Morgan Stanley's announcement said. "Exiting the protocol will allow the firm to invest more heavily in its world-class advisors and their teams, helping drive additional growth opportunities."

UBS announced its exit in November, a year after it said it planned to scale back its recruiting efforts and instead focus on the retention of its existing advisor force.

About 1,700 firms currently participate in the protocol, but Morgan Stanley and UBS are among the four biggest wirehouse firms.

Morgan Stanley had 15,759 total wealth management representatives, according to its latest quarterly earnings report. UBS' U.S. wealth management business had 6,861 advisors as of the third quarter.

The clients are the net loser.
Dennis J. Concilla
Carlile Patchen & Murphy

Bank of America Merrill Lynch, another wirehouse firm with 17,221 advisors as of the third quarter, surprised industry experts when it announced this week it will stay in the protocol.

"While other firms are focused on leaving the Broker Protocol as a way of retaining advisors and clients, we're staying focused on making sure that our advisors have everything they need to serve their clients and grow their businesses," Merrill Lynch Wealth Management head Andy Sieg told his leadership team and market executives on Monday. "We're asking our advisors, in turn, to concentrate on two things: First, to help existing clients achieve their financial goals, and second, to acquire new client relationships."

Wells Fargo, the fourth top wirehouse firm, has made no decisions regarding its participation, a spokeswoman for the firm told

The wirehouse firms represent a shrinking portion of the financial advice market.

Wirehouses had 47,029 total advisors as of the end of 2016, according to research firm Cerulli Associates. Independent channels, including independent and hybrid registered investment advisors and independent broker-dealers, had 124,464 advisors.

How to choose a financial advisor

Client rights

Tash Elwyn, president at the Raymond James & Associates Private Client Group, said the protocol should be the bare minimum — and the industry should aspire to reinforce it.

"We should really do more to strengthen the adviser-client relationship and the ability to serve them," Elwyn said.

It would be "unconscionable" to prevent patients from moving their medical records to another office or hospital, he said. Yet under the protocol, there is only a finite amount of client financial information that can travel between firms.

"That information can and should follow the client at the client's direction," Elwyn said. "I would encourage clients to accentuate the advisor's ability to provide a smooth transition … to request those 'medical records' to follow his or her advisor."

Firms could also do better by providing more advance notice to clients that an advisor will be transitioning to another firm. Currently, an advisor is not able to disclose that move ahead of time, which prevents a preparatory conversation.

"The only party it's good for is the losing firm," said Danny Sarch, an advisor recruiter and president of Leitner Sarch Consultants in White Plains, New York.

How much do you know about your financial advisor?

Financial advisor David W. Karp, a founding partner at PagnatoKarp in Reston, Virginia, left Merrill Lynch with his team in 2011 to establish a more independent practice.

"Because of the protocol, we had the opportunity to build the best solution for our client base," Karp said. "If I didn't have the protocol to utilize, I might have thought twice about that decision."

Without the protocol, advisors who are changing firms would face an "unknown abyss of legal ramifications," he said, which could limit their ability to choose the best model for their clients.

But eliminating the protocol could also do away with one dark spot in the industry: the advisors who change firms every seven years to bolster their personal balance sheet through recruiting bonuses, Karp said.

"The reason why that's bad for clients is, change is disruptive," he said.

We should really do more to strengthen the adviser-client relationship and the ability to serve them.
Tash Elwyn
Raymond James & Associates

The original purpose of the protocol was to establish standards for the transfer of client information and not necessarily to ease advisor moves, said Dennis J. Concilla, an attorney at Carlile Patchen & Murphy, which works with the protocol.

Around the same time Morgan Stanley and UBS left the agreement, about six other firms joined it, Concilla said.

"It doesn't mean that there won't be a protocol," he said of the departures.

But with some firms not participating, firms and advisors will have to be more sensitive about the information they can take, he said. And clients may find it more difficult to maintain their relationships with their advisors.

"The clients are the net loser," Concilla said.

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