As Big Firms Exit Broker Pact, Investors are Uneasy

(New York Times) -- When a financial adviser leaves a firm, clients often get caught in the middle of what amounts to a messy divorce. A squabble now playing out in the wealth management industry suggests that many of those splits could get messier.

Financial advisers act as shepherds for their clients, guiding them to sound investments. As the individual relationships grow, trust builds. If an adviser moves from one firm to another, clients typically follow.

For years, wealth management firms agreed not to stand in the way of such broker recruitment, putting client needs ahead of their own. But now, some firms are balking at letting clients go, and are threatening legal action to make them stay put. At the root of the fight is money, billions of dollars in client fees that wealth management firms reap every year.

The dispute started last year when Morgan Stanley, followed by UBS and Citibank, withdrew from the broker protocol, an agreement that established rules for broker recruitment. The protocol allowed brokers to move between firms and to take their clients with them.

The protocol was started in 2004 with four wealth management firms: Merrill Lynch, Morgan Stanley, Smith Barney and UBS. It is now endorsed by nearly 1,700 firms. But with two of the largest wealth managers pulling out — Morgan Stanley has some 15,000 advisers; UBS has more than 6,800 — an industry agreement most clients have never heard of could have a major effect on them.

The firms that have abandoned the agreement could plant seeds of doubt by withholding information from clients and making it hard for them to find out where their advisers have gone.

“Firms leaving the broker protocol is very, very bad for clients,” said Phil Shaffer, the founder and chief executive of Halite Partners, an investment advisory firm, who left Morgan Stanley last year after 24 years. “As one who has tried to build my career on ‘client first,’ I believe that needs to be shouted from the mountaintops.”

Mr. Shaffer said that firms that took legal action against a departing adviser were “trying to limit the clients’ freedom of choice.”

Big firms say that investors still have a choice. “If the best adviser wants to be some place, the clients will make the best decision for themselves,” said Brian P. Hull, head of the client advisory group at UBS wealth management for the Americas. “You just have to be thoughtful about how you do it. That option still exists.”

But that option is becoming a little harder to pursue.

In the 1980s and ’90s, when an adviser left a wealth management firm — usually to go to a so-called wirehouse, or national brokerage firm — the firm the adviser was leaving would file an injunction in hopes of buying time to persuade clients to stay. Such moves would generally happen in the end, but not without costing the adviser’s new firm money in legal fees. The battles hurt clients, who were caught in between.

The dot-com crash in the early 2000s was a catalyst for change. Client accounts became mired in court fights, and panicked investors were unable to gain access to their cash, prompting regulatory scrutiny. A few years later, the four big firms created the broker protocol.

“The idea was to find a better way not to sue each other every Friday,” said Dennis J. Concilla, a partner in the securities law practice at Carlile Patchen & Murphy, who was involved in creating the protocol and now operates the Broker Protocol, a website that lists the agreement’s participants.

“In the beginning, we thought this was going to be a club for the big guys,” he said. “We thought no one would join. Boy, were we wrong.”

Before the protocol, big brokerage firms had a lock on advisers because of their advantages in technology, marketing and investment products. That is not the case anymore. Technology now allows investment advisers to become registered on their own and to serve clients at a high level without joining a wirehouse. Advisers can also join a growing number of smaller financial services firms like Dynasty Financial Partners, Focus Financial Partners, HighTower Advisors and United Capital that give them more control over their business and provide them a trading platform.

The independence has made some big firms uneasy, Mr. Concilla said.

“This is the first time firms have pulled out,” he said. “All these big firms were arrogant enough to think they were going to be the net winner. Why else would you join? They figured they’d get more brokers than they’d lose, and it’d be an excellent recruiting tool, and they’d save a lot money on legal fees.”

The big firms defend their decision to abandon the protocol. They say they have invested heavily in technology to support their advisers and are acting in clients’ best interest.

“To understand why we withdrew from the protocol, you’d have to go back to June 2016 when we decided to change our operating model and focus on the advisers who are here and the clients who are here, versus recruiting,” Mr. Hull of UBS said. “We wanted to focus on making this a better place. We didn’t even think of the protocol up until Oct. 30 when one of our main competitors withdrew from it.”

That competitor was Morgan Stanley. A spokesman for the firm declined to comment for this article.

Big firms have said that financial advisers built their businesses through the firms’ reputations and were leaving with proprietary information. That notion troubles Brian Hamburger, a lawyer who helps advisers move firms and set up their own businesses.

“There is a bona fide business reason firms want to shut that door,” Mr. Hamburger said. “They want to put up impediments for people departing with what they call their trade secrets.”

Mr. Hamburger questioned the argument that large wealth management firms were protecting client information: “How can something be free one day,” he said, “and the next day, you claim it’s a closely guarded trade secret?”

Despite the battle over recruitment, some people in the industry do not see the trend reversing. “What will now happen is, an individual adviser is going to have a difficult and different experience leaving the wirehouse,” said Elliot Weissbluth, founder and chief executive of HighTower, which recruits advisers from larger firms. “Does it significantly change if we consider an opportunity or not? Not really. There’s a playbook for this.”

For investors who get stuck in a fight between a wealth management firm and a departing adviser, the best advice is to remember that it is still their money and their choice about who manages it.

“The broker protocol made it easy for the client to make that choice,” said Timothy C. Scheve, chief executive of Janney Montgomery Scott, a regional wealth management firm that adheres to the protocol. “Now, with some firms out of protocol, it makes it harder for advisers to connect with their client. The adviser can only send out a wedding-style invitation to the client if they can remember their address because they can’t take that information with them.”

Of course, in a hyper-connected world, it should be easy for people to find their adviser at a new firm. But doing so could become uncertain if a firm were to sue a departing adviser. Morgan Stanley sued an adviser in Illinois this month who had left the firm, saying he took proprietary client information with him.

Mr. Concilla said that the lack of transparency was problematic. Investors could become confused or suspicious if they called a firm and could not find out where advisers had gone.

Still, he said he thought that broker recruitment would continue and that management firms would not be able to prevent advisers from taking clients with them. “I’m pretty sure they’re going to keep moving,” he said.

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