US wealth management: Ghost protocol


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The spectre of collusion may not hang over the US wealth industry for much longer.


Unless you are particularly interested in the US wealth management business, you probably missed one of the most extraordinary announcements of 2017 at the beginning of November. Extraordinary in that any bank was able to make it in the first place. 

Morgan Stanley broke ranks to announce its withdrawal from the Protocol for Broker Recruitment, which has been in place in the US brokerage industry since 2004. Originally established by a handful of firms, by 2017 a staggering 1,500 firms were signed up to it. Some banks, including JPMorgan, were often accused of having some business units signed up to the protocol and not others, thereby gaming the system.

The protocol was designed to put a stop to expensive lawsuits filed by brokers that had lost top advisers who took their roster of clients to rival firms. In return, those advisers would agree not to solicit other clients from their old shop to join their new firm unless it was compensated for the loss of business.

Yes, that’s right. In an era where the merest whiff of collusion could bring a multi-billion dollar fine or even a jail sentence to the unlucky few, the biggest names in US finance were engaged in a voluntary restrictive practice, which apparently US regulators thought was not worthy of any kind of investigation.

Of course that suited the banks, who avoided lengthy and costly lawsuits. But most of all it suited the financial advisers, a cosy coterie of well-paid investment professionals who could switch firms for huge sums whenever they felt like a big one-off pay day, taking all their clients – of course they were theirs, not the firm’s they worked for – with them. 

So enormous credit goes to Morgan Stanley for being the first big bank to break the protocol. It can’t have been an easy decision to make – first-movers often gain kudos in such circumstances but lose money. And sure enough a number of big Morgan Stanley advisers jumped ship between Morgan Stanley’s announcement and its actual withdrawal. 

But certainly not to the extent that some bleating advisers predicted. It is a remarkable irony that professionals who are so self-interested and focused on their own compensation make their living supposedly acting on behalf of the interests of their clients. 


UBS followed Morgan Stanley’s lead, although Merrill Lynch is so far sticking with the protocol, alongside many other smaller firms. And of course the industry insiders quickly filed reports saying what a great thing the protocol had been for clients, without really explaining how. 

Morgan Stanley was not the first big US wealth manager to attack the vested interests of US financial advisers in 2017. UBS Wealth Americas changed its compensation model for recruiting financial advisers. The protocol had assisted financial advisers’ ability to jump ship. When they did so, they could expect their new firm to pay them an up-front signing-on fee of 300% to 400% of the revenues they would bring in the first year. For banks, this was a big cost: the fees were booked as loans, against which they had to hold capital, and which amortized over seven to 10 years. But advisers would often move on every three years or so.

As with Morgan Stanley’s move, UBS’s decision was designed to focus on retaining the best advisers, moving away from high recruitment costs and, in the long-term, benefiting the bottom line of their business. Both Morgan Stanley and UBS expect to quickly provide a positive boost to earnings in 2018 despite short-term up-front costs. 

The head of wealth at one firm describes the moves as “changing the industry dynamics in the US”. 

Another senior Wall Street banker puts it more bluntly: “This will drag US wealth management kicking and screaming into the 21st century.”