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There May Be Trouble Ahead - Morgan Stanley Pulls Out Of Industry Accord

Tom Burroughes

1 November 2017

The US wirehouse industry, already pressured by new regulations encouraging a shift to fee-based advice, is bracing itself for a litigation spree after Morgan Stanley this week announced it was pulling out of an industry-wide “protocol” that had stopped firms from suing staff who left to join rivals.

Morgan Stanley, Merrill Lynch, UBS and other wealth management houses in the US have been signatories to the agreement that, since 2004, has helped to curb potential lawsuits arising from when teams of staff moved to peers, as had happened in the past. 

But Morgan Stanley announced this week that it was exiting the protocol, claiming it has been abused by firms for their own commercial advantage. 

Senior industry figures such as Ron Kruszewski, chief executive of Stifel, for example, has reportedly predicted that the protocol will unravel following Morgan Stanley’s move. “The largest firms brought it , and the largest firms will take it out,” he said . 

There are now more than 1,700 members to the Broker Protocol, as it was called.  Since its founding, lawsuits around protocol-related transitions have been rare in and industry rife with moves and defections from wirehouses. 

In recent years – as regularly chronicled by Family Wealth Report – teams of former wirehouse advisors have left to create entities such as Registered Investment Advisors in the hope of becoming more independent. It is unclear at this point what will be the impact on the RIA sector if the accord breaks down.

Merrill Lynch declined to comment on the matter when contacted by FWR. UBS did not respond to queries at the time of going to press.

“The protocol was instituted in 2004 to limit litigation among member firms by establishing a universal set of rules for advisors to follow when leaving one Protocol member firm and joining another,” Morgan Stanley said in a statement. 

“However, over time the protocol has become replete with opportunities for gamesmanship and loopholes: firms have opportunistically joined the protocol to make a strategic hire and then dropped out; firms have invoked the benefits of the protocol when hiring while using non-protocol affiliates to circumvent the protocol when they lose talent; and firms have unilaterally made exceptions to the scope of the protocol, undermining the objective of a universal set of rules. In its current state the protocol is no longer sustainable,” it continued. 

“Exiting the protocol will allow the firm to invest more heavily in its world-class advisors and their teams, helping drive additional growth opportunities,” Morgan Stanley added. 

The Wall Street-listed firm said it will invest more in its staff to raise overall performance. Morgan Stanley said such investment – no specific sum was given –  would “further the firm’s previously stated commitment to reducing recruiting efforts in order to refocus those resources on existing talent”.

The wirehouse business model is already under threat amid a move, encouraged by the recently-enacted Department of Labor Fiduciary Rule, towards fee-based advice and away from commission-based remuneration associated with a more transactional business model familiar in the wirehouse space. 

At the same time, there has been a trend of more wealth flowing to RIAs and away from the wire-houses in relative terms. According to a report by Boston-based analytics firm Cerulli Associates last year, almost three-quarters of high net worth assets in the US are parked at wire-houses and banks but Cerulli anticipates that the control of HNW assets by providers will expand by 7.3 per cent through 2019, with MFOs and RIAs among the greatest winners, at 10 per cent and 9 per cent respectively.