morgan stanley

Questions Abound After Morgan Stanley Leaves Broker Protocol

A “seismic” event for the industry might have broad consequences.

As part of its rollback on recruitment efforts, Morgan Stanley plans to leave the industry agreement known as the protocol for broker recruiting, a move that raises questions for the wealth management industry.

The protocol, created in 2004, limits litigation among member firms that sign on and agree to a set of rules regarding their advisors leaving and joining another company. In a statement released Monday, Morgan Stanley claimed the protocol had become “replete with opportunities for gamesmanship and loopholes” that undermined the rules. By exiting the agreement, the brokerage said it will be able to invest more in its advisors and drive growth.

But Morgan Stanley’s withdrawal from the agreement could mark a period of uncertainty for an industry already undergoing significant changes.

”From a recruiting perspective we’re in a period of complete unknowns,” said Christopher Pickett, an attorney at Greensfelder, Hemker, & Gale P.C. in St. Louis.

The near-term impact to Morgan Stanley’s advisors is obvious. Whether a broker joined the firm 10 years or 10 months ago, they joined with the understanding that Morgan Stanley was part of the protocol and that they would be shielded if they decided to switch firms. That protection is no longer in place, but brokers will likely feel they should have the benefit of the agreement, Pickett said.

The manner in which Morgan Stanley presented the change to advisors was also something Pickett was interested in. How aggressive the brokerage will be in enforcing its rules and going after departing advisors remains to be seen.

Firms that are not part of the protocol tend to be more aggressive litigators and arbitrators—which makes it harder for advisors to leave and take clients with them. It’s not impossible to part ways but it’s more difficult and requires more planning, said Scott Matasar, a senior securities litigation, enforcement and regulatory defense attorney at Matasar Jacobs in Cleveland.

In addition to Morgan Stanley brokers, there will likely be broad implications for the industry after the “seismic shift,” Matasar said.

“It may very well be that this could start a domino effect,” he said. “What advantages are there for the other wirehouses to stay in it?”

Pickett also said the other wirehouses—UBS, Wells Fargo and Merrill Lynch—could leave the protocol. As a result, advisor movement might slow.

Still, the threat of litigation might not be enough to dampen interest in advisors leaving, especially for the independent space where advisors might have some ownership in their firm and the compensation is better.

Shirl Penney, the president and CEO of Dynasty Financial Partners that specializes in helping high-producing advisors and teams establish their own RIA, said he thinks Morgan Stanley’s withdraw from the protocol could accelerate the migration of advisors to the independent space.

The possibility of other firms exiting the agreement could push advisors thinking about starting or joining an RIA to make a move.

“I see this as a very good thing for us launching big teams,” Penney said.

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