Morgan Stanley Leaving Recruiting Protocol. What’s the Impact on Advisors?

Morgan Stanley has announced they are leaving the Protocol for Broker Recruiting this Friday, November 3, 2017. What does this mean for financial advisors – those currently there, or looking at the possibility of joining that firm in the future? Read on for my thoughts.

In a nutshell, the Protocol is a voluntary agreement signed by many – but not all – broker-dealers that allows a financial advisor to take certain client information with him or her if they leave a broker-dealer that is a signatory to the Protocol to join another broker-dealer that is also a signatory to the Protocol. This enabled the financial advisor to contact his or her clients and solicit them to move their accounts to the financial advisor’s new firm. Like all contracts, there are conditions that apply, and the Protocol does not apply every time a financial advisor leaves a firm. The aim of the Protocol was to reduce litigation among firms. In doing so, it made it easier for financial advisors to move from firm to firm, provided they complied with the conditions of the Protocol.

On October 30th, Morgan Stanley announced a new talent investment program that they described as being, “designed to empower financial advisors and their professional staff to strengthen client relationships and to drive further growth opportunities. Prioritizing investments in existing talent will enable Morgan Stanley to maintain its position as the leader in wealth management.” The firm also stated that, “These investments further the Firm’s previously stated commitment to reducing recruiting efforts in order to refocus those resources on existing talent. Accordingly, Morgan Stanley will exit the Protocol for Broker Recruiting (the Protocol).” Read their press release here.

According to Bruce Kelly over at Investment News, “Morgan Stanley advisers were told in an email Monday that the firm would enforce client confidentiality and non-solicitation agreements.” Kelly also reported that, “Morgan Stanley managers were told on Monday morning that new employment agreements may include a one-year non-solicit agreement. Under such an agreement, Morgan Stanley brokers moving to a new firm would be forbidden for 12 months from contacting clients once they left, according to those sources.”

I don’t represent Morgan Stanley and no one there consulted me on this decision, so my thoughts here are just that – my thoughts. But here’s my take on the situation: Morgan Stanley is looking to reduce recruiting efforts relative to hiring experienced advisors from other firms, and along with that, the expense of that process that often includes large up-front payouts tied to retention and performance. By driving down that type of recruiting activity (and the expense associated with it), the firm will likely instead focus on developing its own sales force from within, spending resources on hiring and training rookie financial advisors, and also on helping advisors at the firm now grow and develop their business. Morgan Stanley must think that this is a better expenditure of their funds and it will lead to higher profits and a return for its shareholders.

I imagine most experienced Morgan Stanley advisors have been trying to find their registered rep. agreement with the firm, to review it and see what type of restrictive covenants are in it (such as a covenant not to solicit clients, not to solicit employees, etc.) and are wondering how the firm’s departure from the protocol impacts them should they choose to go elsewhere. And for those advisors contemplating joining Morgan Stanley, it’s more important now than ever that they have their proposed contract reviewed by legal counsel so that they understand what handcuffs are on them if they join the firm. Is there a covenant not to solicit clients? If so, what clients and for how long? What other restrictions might be imposed under new contracts? In the absence of a protocol agreement, these financial advisors need to be fully briefed on the legal ramifications of their contract if they decide later that they want to “take their talents” to another firm, to paraphrase LeBron.

Will other firms follow the lead of Morgan Stanley and pull out of the Protocol? It’s too early to tell. Some might, but others might stay in and then tout their efforts as being both advisor and client friendly, and possibly use that as a recruiting advantage. Whatever other firms do, my sense is that there won’t be many experienced financial advisors with portable business beating down the doors to join Morgan Stanley. But we’ll see.

Even though Morgan Stanley pulls out of the Protocol, advisors there will still be able to leave to go to other firms. The issue, of course, will be whether that advisor is subject to any restrictive covenants, such as a covenant not to solicit, meaning that the advisor would not be allowed under his or her contract to solicit clients to follow them to their new firm. And further, the advisor likely will not be able to take with them the information allowed now under the Protocol, and the advisor must also be cautious about ensuring compliance with Regulation S-P. Clients generally will still have the choice of their firm and advisor and would generally remain free to move on their own initiative.

Whether you’re an experienced advisor or a soon to be rookie advisor, make sure you are fully informed and understand any contract you sign, so that you understand how it effects your ability to move your book of business elsewhere if that’s what you decide is best for you. And, if you’re a Morgan Stanley advisor, make sure you fully understand, and have reviewed with counsel, any new employment agreement offered to you, including any retention bonuses in the future. Those may contain restrictive covenants that might not be in your best interest if you are contemplating a career transition in the future.

Finally, for any advisor considering making a move, be sure to review your rep. agreement with counsel prior to making a move elsewhere. To discuss your situation, contact us at The Beck Law Firm, LLC. We’ve got experience in helping advisors make successful career transitions and in helping them protect their #1 investment: their careers.