Investors should study ‘broker protocol’ for their protection

  • Morgan Stanley and UBS are withdrawing from the "protocol for broker recruitment" they (or their predecessors) helped found, possibly complicating investor-advisor relations.
  • Protocol or no protocol, industry rules prohibit trusted advisors from telling clients about a planned transition between firms. Investors should get proactive.
  • Ultimately, it is an investor's decision as to where his or her money is managed.

Senior businessman in office
Daniel Lafor | Getty Images

It's 4 p.m. on a Friday, and out of the blue you get a phone call from your brokerage firm — but it's not the trusted advisor with whom you have worked for 20 years. Instead, it's a new voice from a person you don't know, who tells you that your former advisor has left the firm and your account has been reassigned to him.

Of course, you ask where that trusted advisor has gone; does this person have his phone number? The guy on the other end of the call ducks the question and asks to meet you, to revisit your financial plan, to review your portfolio, and hints that he could do much better for you than your trusted advisor could. In fact, he offers to cut the fees you pay and to increase returns.

Your trusted advisor may have been a family friend or a crucial part of your world for decades. How or why would he pick up and leave without even telling you? Has he really been performing so badly and overcharging?

Later that afternoon, or perhaps over the weekend, you get a call from your trusted advisor. He informs you that he has left that management firm and joined a smaller firm. But that is the extent of his communication. Instead of being eager to have you move your accounts to him, he seems almost meek, reluctant to engage.

The other guy, in the meantime, has called you three times, anxious and excited for the opportunity to win your business. Only when you specifically ask whether you could continue to work with him does your trusted advisor give you instructions on how to work with him going forward and tell you his reasons for what he did.

What in the world has happened?

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Even if this scenario has never happened to you, it likely will at some point. There are changes happening in the wealth management world which could put your investments in the middle of a legal dispute between your trusted advisor's new firm and his old one.

It's called the protocol for broker recruiting, and investors need to get a understanding of this for their own protection.

Prior to 2004, wealth-management firms would routinely sue each other when a financial advisor changed firms. The losing firm would claim that a client's data, including his or her contact information, was a trade secret, like the formula to Coca Cola.

As recruiting heated up between these institutions, it was more and more common for the same firm with the same attorney to argue the exact opposite position in front of a judge in back-to-back weeks. When they lost an advisor, he was stealing company secrets. When they recruited an advisor, he was executing his right to work wherever he wanted with clients that he developed himself. In 2004 three of the largest wealth-management firms at the time — Merrill Lynch, UBS and Smith Barney — agreed to a "protocol" that, when adhered to, would stop this silliness.

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Within the protocol, legal injunctions over the fight for client assets were rare. Advisors were allowed to take basic contact information with them. Firms still competed for the assets, but the legal part of the "war for talent" was largely gone. Over the past two months, Morgan Stanley (the successor firm to Smith Barney) and UBS have both announced that they would no longer be "members" of the protocol. The implicit threat is that if an advisor leaves, he will not be permitted to take any client data with him, even the most basic contact information. He will presumably recreate that contact information from memory and public sources. And once that information is gathered, he will only be allowed to inform his clients of his new affiliation, but not solicit that business to follow.

If he solicits or takes any information, then his former firm is likely to attempt to legally prevent him from talking to his clients at all.

Remember the conversation I cited earlier. The old firm is claiming that it somehow "owns" the relationship with you, as if it is possible to own someone else's money. Remember the odd conversation with your trusted advisor? It took him a while to get you on the phone because he had to recreate your contact information from memory and then contact you without directly asking to retain your business.

The protocol effectively allowed clients to choose their own trusted advisor based on good, old-fashioned competition. Sometimes the new guy did indeed become the new trusted advisor. More often than not, clients followed their trusted advisor to his new institution. Firms that do not think that they can retain their best people based on the simple fact they offer a great place to work will act out of weakness to legally prevent good employees from leaving. That's what the firms who have left the protocol are saying.

"Understand the machinations behind your trusted advisor's move, and make your own decision on which person and which firm best suits your needs."

What can investors do to ensure that they are working with the trusted advisor of their choice? Understand that, within the protocol or not, industry rules prohibit your trusted advisor from telling you about his intentions before his transition. First, make sure that you have your trusted advisor's cell phone number. This way, if this odd dialogue occurs, you can call your trusted advisor proactively.

Second, ask your trusted advisor specifically why he has made this change and judge for yourself whether you want to move your accounts with him. Third, if you want to move your account, or if you choose to stay with the old firm, make your intentions explicit in writing.

Good advisors are in high demand. Understand the machinations behind your trusted advisor's move and make your own decision on which person and which firm best suits your needs. Ultimately, no matter what anybody says, the choice to move your money or not is yours and yours alone.

— By Danny Sarch, president of Leitner Sarch Consultants

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