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Morgan Stanley Announces Exit from Protocol for Broker Recruiting

On October 30, 2017 Morgan Stanley announced that it would exit the Protocol for Broker Recruiting (the “Protocol”), effective on Friday, November 3rd.  Firms such as Morgan Stanley and Merrill Lynch signed on to the Protocol in 2004, in an effort to limit costly litigation or arbitration claims that can arise when brokers transition to new firms, or set up arrangements such as a Registered Investment Advisor (“RIA”). The Protocol is intended to outline an orderly system for transitions, by limiting the client information brokers can bring with them during job changes to the following: names; addresses; phone numbers; email addresses; and account title. Other client information and documents are not permitted to be taken. The Protocol additionally restricts brokers from telling clients they are planning to move, or from committing any other forms of pre-solicitation.

While the Protocol is advantageous to firms in terms of reducing litigation and compliance costs, these benefits are offset by the downside of increased volume of broker transitions. The frictional costs and risks associated with a broker moving his or her book of business are reduced by the Protocol —thereby giving brokers more bargaining power in recruitment deals, and instigating recruitment package bidding wars between banks.

Morgan Stanley released a statement, titled “Morgan Stanley Announces a New Talent Investment Strategy to Deliver Added Value to Clients.” The statement mentions technology solutions for strengthening investment objectives for clients, a focus on building client relationships, and other marketing tactics, all used as a prelude to justify leaving the Protocol, under the auspices of protecting client interests. Morgan Stanley emphasized that they will focus on building existing talent: “[t]hese investments further the Firm’s previously stated commitment to reducing recruiting efforts in order to refocus those resources on existing talent,” a strategy intended to reduce costs.

This strategic decision falls in line with consolidation trends in the larger wealth management industry as other banks, such as Merrill Lynch, make significant changes to their broker recruiting strategies. In May 2017, Merrill Lynch halted their conventional broker recruiting program, opting to transition into a salary based compensation plan in which brokers compensation is less contingent on a grid with performance hurdles. As the industry moves further away from commission based fee generation to pure fee accounts in which flat percentages are charged, incentive grid plans will need to be restructured.

A Morgan Stanley spokeswoman’s only addition to the Press Release was “[o]ver time the Protocol has become replete with opportunities for gamesmanship and loopholes,” and “[i]n its current state the Protocol is no longer sustainable.” This move puts Morgan Stanley on the defensive, and could be interpreted to mean they are intending to cut costs in their wealth management division. It also makes it more difficult for existing Morgan Stanley brokers to transition, as the potential for Temporary Restraining Orders (“TRO’s”), Injunctions, and/or costly litigation from your former employer will drastically increase if that employer is not a member of the Protocol.

The attorneys at Lax & Neville LLP have extensive experience in negotiating broker transitions, overseeing the complex process of meeting compliance requirements from both Protocol and non-Protocol firms, and representing brokers in all manner of regulatory matters. If you are considering transitioning, setting up a Registered Investment Advisory, or have employment disputes in the securities industry please contact Lax & Neville today at (212) 696-1999 to schedule a consultation.