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4 Aug Boston Cardinal

What Financial Advisors Need to Know About Broker Protocol

Note: This article was originally published as a three-part series on LinkedIn.

Part I: The History of Broker Protocol and Why It Exists for Financial Advisors

If you’re a financial advisor who believes in doing what’s best for your clients and you’re not familiar with the term broker protocol, it’s time to slam on the breaks and familiarize yourself with what’s unfolding across the industry. 

While you’ve been busy guiding your clients through navigating their financial goals and overcoming market volatility, Broker Dealers and RIAs have been evaluating their strategy to achieve their profitability goals and reshuffling business models to make it happen. It’s becoming quite clear that the financial services industry has become more complex over the past few years with new regulations, different investment products, and most importantly how your firm views your relationship with your clients. 

You might not know this, but the term broker protocol is one of the biggest indicators on how your firm views whether your client is yours (advisor) or theirs (firm). Advisor opinions vary on this topic, depending on whether an advisor has worked hard to earn clients, scale and grow their practice, or if an advisor has been assigned clients by their firm.To start, just like you help your clients manage risk, evaluating the impacts of whether your firm has chosen to participate in broker protocol is perhaps the biggest way to protect the relationship you have with clients across your practice. 

Let’s begin with some insights on the intentions behind broker protocol and the benefits/limitations of participating in the agreement. (Disclosure: this is not legal advice, just the personal experience of a recruiter who has helped hundreds of advisors change firms and heard from financial advisors who had unexpected events happen that are now becoming normal across the industry).

Why Does The Broker Protocol Exist?

In 2004 several major broker dealer firms came together after financial advisors kept changing firms. Each time an advisor moved, it seemed like there was a different set of rules and far too much ambiguity behind the rules surrounding going to a different firm. These advisor transitions were creating big issues with everything from client privacy to poaching clients. 

To help manage litigation costs, a handful of firms aligned on a set of mutually agreed upon data points (client name, address, phone number, email address, and account title of the clients) they felt were acceptable for a departing advisor to take with them. The idea is that the departing advisor enters all of these data points into a spreadsheet and when they proceed to change firms, the file is provided to the firm they join as a way to begin setting up new accounts and transfer paperwork. The same file is also provided to the prior firm to show exactly what information was taken to begin transferring client accounts. As long as this agreed upon process was followed, the firms stay amicable and save themselves time and energy in the courtroom. 

We foresee major implications for financial advisors in the coming years.  Firms are making it more and more difficult for advisors to leave by going non-protocol, effectively restricting clients from staying with them in the event that the advisor changes firms. This advisor “trap” gives firms more leverage in changing payout structure and compensation, looking to reduce expenses by reassigning the advisors’ book of business over time.

Part II: Who Belongs, Why Firms Keep Changing, and What it Means for RIAs

Who Belongs In The Broker Protocol?

The first 10 firms that joined quickly found out broker protocol can be great for recruiting advisors to your firm, but can also open up the floodgates if your advisors are unhappy. 

If you're coming from a broker protocol firm and joining a broker protocol firm, the chances of a Temporary Restraining Order or some type of litigation is conceivably going to be much lower than if you are leaving a non-protocol firm.  In a non-protocol firm, the company can have anything from one standard type of Rep Agreement to a plethora of Rep Agreements where you need an attorney to peruse over all your legal contracts with a fine tooth comb to understand what rules advisors must follow upon their departure. 

Over the past 18 years, firms have joined and then left the protocol agreement based on their ability to attract and retain their advisors. If you're non-protocol it doesn't mean you can't leave your firm.  It's just a longer, complicated, more expensive process. In my opinion, life is just easier for clients of advisors at a protocol firm. If their trusted advisor decides to affiliate with a new firm, and they want to continue with the same advisor, the process of transitioning your accounts to the new firm is less restrictive at a protocol firm.

Why have firms been changing between protocol and non-protocol?

It really comes down to two simple schools of thought. 

First, many firms are struggling to grow organically, so they turn to growing inorganically by recruiting established advisors with existing revenue streams and clients that they can bring with them during a transition. Now, imagine you're the recruiter of a non-protocol firm having a conversation with an advisor considering a change of firms. Do you think the advisor wants to join a firm that says, “We make it harder for advisors to leave” or  “We make it easier for advisors to leave”?e We don’t get married just to think about getting divorced, but knowing your spouse was going to make a possible divorce much more difficult would probably change your thinking about the marriage going into it.

Second, firms are trying to manage margins to achieve their profitability targets. The most significant expense for financial services companies is what they pay their financial advisors.  Knowing that the industry is expecting a record number of advisors to retire in the coming years, we see a few conclusions emerging: 

  • Firms are creating strategies to retain clients, sometimes at the expense of their current advisor, and we’re seeing more advisors be terminated for reasons that leave us scratching our heads.
  • New training programs are popping up across the industry, and clients from longstanding advisors with higher payout rates are getting reassigned to different advisors in new programs offering lowering payout rates. 
  • Advisors are finding it more difficult to move their practice to different firms because of the restrictions firms are putting in place by exiting broker protocol and limiting the amount retiring advisors receive for the value of their practice.

How Does This Impact RIAs?

What we've been seeing is that RIAs are now starting to figure out how to navigate broker protocol and make it easier for advisors to break away from the broker dealer space. 

There are really two common themes we see in the RIA landscape:

The first is that existing RIAs are joining broker protocol to help attract advisors to this space. This way, if an advisor wants to join as an IAR, they follow the broker protocol rules and can "tuck into" an existing firm. 

The other theme is if an advisor files to create their own RIA, they join the broker protocol agreement upon creating the RIA, and then can follow the same rules. The reason this is important is in order to enact the broker protocol process you need to not only be coming from a protocol firm, but also need to join one. So in the event an advisor wants to create their own RIA they might as well join the protocol agreement.  

More importantly, if you're an existing RIA looking to recruit advisors to join as IARs then they'll have an easier transition coming from and going to protocol firms. Keep in mind, just because an advisor is affiliated with a protocol firm doesn't mean they always bring clients with them as they might have subjected themselves to non-solicits, non-competes, etc. (Think of an advisor who joins a team at a protocol firm and just services some of the clients, or an advisor sells a portion of their practice to another advisor, and it has a non-compete for them after they sell.)

In the final part of our 3 part series on themes surrounding broker protocol, we discuss potential impacts to your client relationships,  the value of your practice and ability to choose the fate of the next advisor that ultimately becomes the successor to your business. 

Broker Protocol Part III: 5 Questions Advisors Should Ask Before Changing Firms 

There are some important questions to consider and several actionable steps to take right now if you want to keep your practice in the strongest position possible. Let’s start with five important questions to ask yourself and how it might impact your practice:

  1. Is my firm a member of broker protocol? Do you philosophically believe affiliating with a non-protocol firm aligns with your values? Check the directory to find out whether your firm is a member: 
  2. Do you think there’s a chance you might want to change firms at some point in the future? If so, carefully consider which firms you might consider joining, and find out if they are members of broker protocol. If you know anything about supply and demand, know that the harder it is to transition your practice, the less demand there is for people to acquire your practice, making your practice far less valuable (We’ve seen advisors receive millions less for their practice when they go to sell because of this).
  3. If your firm is not a member of broker protocol (Non-Protocol), ask yourself why? If you don’t know, then consult with someone who has experience in this space. 
  4. Have you heard of the phrase violation of firm policy? Over the past few years countless advisors have been terminated from their firm for violation of firm policy, many of which are firms that are not members of broker protocol. Imagine finding out you’ve been terminated and trying to retain your practice from a non-protocol firm.
  5. What’s really going on here? Is the industry signaling that it should be harder for advisors to move firms and retain the clients within their practice when they make a transition? If firms are struggling to attract advisors, don’t you think that’s a sign that there’s a hole in a sinking ship?

It all comes down to the simple notion of whether you want to have control over the future of your practice or stay in a position where you roll the dice and hope it all works out. If any of these action items resonate with you, my advice is to connect with an experienced recruiter to evaluate your options. 

  1. If you want full control over deciding who becomes the successor for your practice, make sure you’re affiliated with a member of broker protocol or take a close look at your agreement.
  2. If you’ve been seeing advisors with large practices mysteriously terminated for violation of firm policy, don’t think you’re immune to catching the wrath. Start prioritizing what you want for your practice, and consider how challenging it would be if this happened to you. 
  3. If you’re considering making a change, take a moment to consider these topics and make sure you don’t join a firm that will be more restrictive for your business.

Here's a link to the broker protocol for more information:

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