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The End of Protocol May Temporarily Slow Breakaways, But It Won’t Stop Them

The recent news of two major wirehouses exiting broker protocol may have some financial advisors contemplating a move feeling unsettled. However, experts say they should not worry. Although the end of protocol may change the exit strategy for some advisors seeking independence, it does not need to stop them, and it won’t.

Established in 2004, broker protocol is an agreement among financial firms that sets a standard for what client information a financial advisor can take when making a move. Protocol eased the transition somewhat by preventing lawsuits and restraining orders from being filed. However, late last year, Morgan Stanley and UBS, two of the four largest wirehouses, exited the protocol agreement.

Shad Besikof, president and COO at TruClarity, points out that many advisors made that leap to independence before protocol, and many more will continue to do so. Some estimates show that 25 to 30 percent of all breaks are non-protocol.

“This continues to be a good time for advisors to go independent,” he says. “Strong legal counsel and customized marketing plans are key to any exit. Our transition plans provide unique solutions in each area.”

Identifying the Differences in Protocol vs. Non-Protocol

Pamela Stross, CEO at TruClarity, says that some things are the same under protocol and outside of protocol. Among the similarities:

  • You are obligated to demonstrate duty of loyalty to your current employer.
  • You cannot give your clients any kind of notice or indication of an impending change.

A major difference, however, is that outside of protocol, your employment agreement becomes key. In short, it will govern your move.

TruClarity suggests that all advisors have their employment agreements reviewed by industry legal experts at the beginning of the process of breaking away. This review will guide your custom exit strategy as well as the carefully crafted launch plan for your new firm.

Having A Plan and Experienced Counsel Are Vital for Both Protocol and Non-Protocol

“Advisors who were considering independence or a transition to another firm will need to reassess those plans through a new lens,” says Sharron Ash, chief litigation counsel of Hamburger Law Firm. “While there will always be strategies to successfully extract a financial advisor from their current firm, the path out is now more treacherous and requires careful planning and diligent execution.”

Advisors creating an RIA following a non-protocol exit may have to adjust their planned timeline. It could take longer to build up your revenue stream in the new RIA because you lose the luxury of exiting with a list of potential clients.

“It’s all about being aware and prepared. We run pro-formas for all clients and conservatively slow down projected cash flow in a non-protocol move,” Stross says. “In our experience, with the right planning and action, it’s still possible for advisors to end up with more than 90 percent of clients following them.”

Your Unique Path to Independence

This shift in protocol has put a spotlight on the custom nature of each advisor’s path to independence.

“Advisors are genuinely fearful when there is volatility and change,” says Brian Hamburger, president and CEO of MarketCounsel. “They want a simple ‘how-to’ guide for every advisor that leaves a firm, but it’s not available.”

He adds: “When we look back at this in a few years, we will find that the desire for advisors and clients to leave only increased when the prison gates were closed. We’re hearing from more of these guys now than we have in the last few years. They want to know, ‘What are the big firms afraid of, and why are they ducking out of the protocol?’”

Interested in Independence But Not Sure Where to Start?

Rest assured, the future is bright. With the right planning and professional support, financial advisors have every opportunity to safely and successfully transition to independence.

“These new shifts in protocol may present advisors with unknown factors that could make it more critical than ever to seek the counsel of experts who have been through the process before,” Besikof says. “It would be a smart investment to have a professional on your team to help you avoid unnecessary or misunderstood risks.”