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The Broker Protocol Celebrates Its Sweet Sixteen

Should I stay or should I go?

The Protocol for Broker Recruiting was established in 2004 by three major wealth management firms: Smith Barney, Merrill Lynch, and UBS. The “principal goal” of the Broker Protocol was to allow departing advisors to take certain customer information and solicit customers regardless of whether they had agreements that expressly prohibited such conduct. Now, some 16 years after its launch, the Broker Protocol has more than 1,900 members across the United States.

However, in late 2017, two of its founding members—Smith Barney (now Morgan Stanley Wealth Management) and UBS—as well as Citibank, withdrew from the Broker Protocol. In addition to being founding members, these firms together employ over 25,000 brokers and have over $1.3 trillion in AUM. These firms made the calculation that, after more than a decade-and-a-half in the Broker Protocol, the costs outweighed its benefits. But why? What changed? More important, what should firms consider when thinking about joining or leaving the Broker Protocol?

All three departing members had their own reasons for leaving, but there were no doubt similarities in their reasoning.  In parsing through the language that addressed and surrounded their departures, and the articles that discussed these departures, one could see several themes emerging, such as the exploitation of “gamesmanship and loopholes” whereby a firm would join the Broker Protocol, make a strategic hire and then drop out; or, similarly, firms joining and invoking the benefits of the protocol when in hiring mode and then leaving the Broker Protocol once they started losing talent.

Another common theme among all three firms is that they simply decided to change their model from outside recruiting to building up their in-house workforce and platform.  Indeed, as Brian P. Hull, head of client advisory group for UBS Wealth Management for the Americas, told the New York Times in a January 20, 2018 article: “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. We wanted to focus on making [UBS] a better place.”

Although many feared that these high-profile departures portended the collapse of the Broker Protocol, which would undoubtedly lead to increased litigation and decreased RR mobility, that has not been borne out in reality. In fact, there are currently more members of the Broker Protocol than there were in 2017 (although it is unlikely that these new members make up for the amount of Assets Under Management that left the Broker Protocol with the departure of Morgan Stanley, UBS, and Citibank) and litigation involving departing advisors has not shown a significant increase.

So what should a firm thinking of joining or leaving the Broker Protocol do? At a high level, such a decision should be based on a firm’s unique business considerations, culture, needs and risk tolerance.  Nevertheless, there are certain factors and questions that should be considered by business and legal decision-makers, including:

What are the short term and long term business goals and objectives?

If your firm is in growth mode, joining the Broker Protocol may seem advantageous, since your firm may be able to hire from other member firms without the threat of costly and time-consuming litigation. However, what about when the shoe is on the other foot and your advisors are now being targeted and recruited away by other Broker Protocol members?

Understand that the Broker Protocol is not “industry standard” and has no impact on Non-Protocol Members.

Not all brokerage firms, including most of the largest brokerage firms, are members of the Broker Protocol, and some larger Broker Protocol members have carveouts for certain divisions, business lines, and subsidiaries. Consequently, Broker Protocol firms need to pay close attention to the specific business entity identified on the list of Broker Protocol members in order to make sure that the recruited RR is part of a group that is beholden to the strictures of the Broker Protocol. 

Moreover, courts have rejected attempts by members of the Broker Protocol to graft the requirements of the Broker Protocol onto non-members.  Thus, if you are looking to hire an advisor from a non-member firm, then you must: (a) find out if the advisor is subject to any post-employment restrictions/obligations (i.e. confidentiality provisions and restrictive covenants); (b) assess the enforceability of these restrictions; and (c) identify any potential legal and/or business risks that could come with the hire. 

Leaving the Broker Protocol does not mean your customer information automatically becomes confidential.

The Broker Protocol allows advisors to take client names, addresses, phone numbers, email addresses, and account titles with them to their new Broker Protocol firm.  Most, if not all, non-Broker Protocol members consider this information to be confidential and proprietary; therefore they take steps to insure that this information is not disclosed to a competitor. By being part of the Broker Protocol, members lose the ability to claim this information as “confidential,” and resigning from the Broker Protocol does not magically convert the client information to “confidential.”  Rather, a resigning Broker Protocol member must take steps after resigning to ensure that this information is being treated as “confidential.” 

Although there is no one size fits all approach to protecting confidential information, such steps should include, at a minimum, labeling/identifying the information as confidential, only allowing people who need the information to perform their business functions to have access to the information, making sure the information can only be accessed through confidential and proprietary servers that require unique user names and passwords, requiring individuals who have access to the confidential information execute confidentiality agreements before being granted access to the confidential information, and performing periodic audits to verify that the confidential information is protected and being kept in accordance with best practices.     

Remember that there are still protections in the Broker Protocol with respect to Advisors who are part of a team.

Broker Protocol members can still take steps to protect against departing RRs who are part of a team and, conversely, hiring Broker Protocol members need to remember the protections (and also remember that the RR needs to resign in writing and provide his/her former firm with a list of what he/she is taking to the new firm). Specifically, for firms whose RRs operate within a team or partnership, those firms can have agreements that dictate the clients and confidential information that the RR can take with him/her to another Broker Protocol firm. For example, a firm could limit the departing RR to only the clients that the RR serviced over the last twelve months or only clients in a certain income bracket or geographical area.

Jeremy A. Cohen, J. Scott Humphrey and Erik W. Weibust are partners at Seyfarth Shaw LLP in its New York, Chicago, and Boston offices, respectively.

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