Legal battles loom between broker-dealers and departing advisers

One aspect of the financial advice industry that clients rarely see is the friction that can occur when an adviser leaves a company, either to join another broker-dealer or to set up on their own.

This is partly because, for the past 13 years, companies have been signed up to a pact that helps advisers make a smooth departure. Depending on the company involved, however, this is changing.

The Protocol for Broker Recruiting was signed in 2004 by UBS Financial Services, Citigroup Global Markets, and Merrill Lynch, Pierce, Fenner & Smith. Its purpose was to reduce the number of disputes caused by advisers changing companies.

The protocol, which now has more than 1,700 company signatories, allows advisers to take client information — names, addresses, phone numbers and email addresses — when they leave. At stake are billions of dollars in client assets that either stay with a company or move with an adviser.

In recent months, the civility provided by the protocol has been disrupted by the withdrawal of high-profile signatories, led by Morgan Stanley in November, followed by UBS in December and Citigroup in January. At least 26 signatories quit the protocol in 2017, and at least six left in the first six weeks of 2018.

Before last year, withdrawals numbered only about 100 during the life of the protocol, says Dennis Concilla, head of Carlile Patchen & Murphy’s securities litigation and regulation practice group.

Morgan Stanley, UBS and Citigroup say they decided to leave to support their strategies of nurturing and retaining loyal advisers.

Lawyers and headhunters say the change is likely to lead to more legal action and arbitration.

Morgan Stanley, for instance, has filed several court requests for temporary restraining orders (TROs) against former advisers. Its arguments include claims that the advisers breached contractual obligations which bar them from soliciting the company’s clients.

Non-solicitation agreements that cover the year after an adviser’s departure are typical in the industry.

Morgan Stanley was granted TROs in four of those cases as of the end of February, while one was pending, and another was withdrawn and moved to arbitration. In February, UBS quietly included a non-solicitation clause in its advisers’ 2017 bonus payment agreement but rescinded it when staff began grumbling. It said the clause would be part of its 2018 bonus payment instead. Morgan Stanley and UBS declined to comment.

So how does this affect investors? They are caught in a tug of war between the broker-dealer companies and the departing advisers.

In its lawsuits, Morgan Stanley has said that a critical component of its success is its relationships with clients, especially high net worth individuals. The company says it spends time, money and resources to find, service and maintain clients and to secure information.

When a broker-dealer company wins a TRO against a former adviser, this typically means the adviser is barred from benefiting from any client information already taken from the company’s records, says Thomas Potter, a partner at law firm Burr & Forman in Nashville, Tennessee. While a TRO is in place, the client accounts remain with the broker-dealer company.

Barbara Roper, director of investor protection at the Consumer Federation of America, believes that it is investors who should decide whether their loyalty lies with the broker-dealer company or the adviser.

“There ought to be more thought given to how to make this process work for investors,” she says.

Raymond James is among the broker-dealers that say they will stay in the protocol, stressing that it believes the client relationship belongs to the adviser, not the company.

“Recognising that it is the financial adviser who has earned the client’s trust and built the relationship over time, we believe that advisers should be able to provide that continuity of advice and care for their clients — no matter their firm affiliation,” says Tash Elwyn, president of Raymond James & Associates private client group.

Citigroup, meanwhile, says leaving the protocol does not mean it will hold its clients hostage. “Acting in our clients’ interest is our top priority and customers are always free to move their investments as they choose,” says a Citi spokesman. “Our exit from the broker protocol does not in any way inhibit customer choice but instead fosters financial wellbeing by giving clients sufficient breathing room to make their own decisions.”

The advisers in this year’s Financial Times Top 400 group appear to be loyal to their broker-dealer companies. They have stayed with their companies for an average of 20 years, and only 37 of the advisers have changed companies in the past five years. They are, however, a small fraction of the more than 630,000 registered brokers.