Newsletter Signup

Search Our Blog

How Brokers Can Exploit the Broker Protocol to Facilitate Their Breakaway

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, December 19, 2016.

Erwin J. Shustak, Esq.
619.696.9500 ex. 105
[email protected] 

Recently, a group of 13 brokers left Morgan Stanley with $2.2 billion of client assets to start their own firm, taking with them a lucrative and sizable amount of revenues. By following the Broker Protocol, they were  able to make the split from Morgan without fear of retribution or liability.

The 13 Morgan employees spent months of secret and meticulous planning for the departure. They left a Morgan Stanley office in Wichita, Kansas, on a Friday evening with the phone numbers and email addresses of over 800 Morgan clients and then spent the weekend frantically contacting those clients to induce them to move their accounts to their new, upstart firm. And they did this legally, exploiting their rights under the Broker Protocol which Morgan, and more than 1,000 other firms, have signed which effectively waived their right to sue in such situations.

While the Broker Protocol put an end to the squabbling of firms when brokers left one firm to join another, it has had the consequence of allowing brokers to shift billions of dollar of assets, and hundreds of millions of dollars of revenues, from the major wirehouses to smaller, upstart firms and independent broker-dealers.

Over the past handful of years, there have been some large defections. Bank of America Corp. and Deutsche Bank AG each lost $3 billion teams to upstarts. Many of these departing brokers have left after their forgivable, up-front notes, given to them as retention bonuses, or “golden handcuffs” during the financial crisis of 2008-2009, have expired.

The Protocol has had the unexpected effect of shifting large amounts of assets and diverting significant revenues from major firms by giving departing brokers a “blueprint” for lawfully diverting their clients to new, upstart firms. The Protocol for Broker Recruiting, initially intended to end squabbles amongst the major wirehouses when they recruited brokers from one to the other, is making some of those early signators question whether they want to continue to be parties to it.

According to the Protocol, if brokers are careful, and follow it precisely, they avoid any consequences of employment restrictions if they only take five pieces of information with them when they depart. Those five pieces of information are all that a broker needs to effectively solicit, and move, their clients from one firm to the other- names; addresses; email addresses and account titles. The Protocol is only a three page, double-spaced document, but the devil is in the detail and brokers planning a transition need the help of experienced legal advisors.

Brokers have a big incentive to leave the wirehouses with their clients and go independent. Wirehouses on average pay brokers 40% of their production- the fees and commissions they generate from their clients. Independent firms, on the other hand, pay as much as 95% payouts. By leaving a wirehouse and even transitioning 75% of a book of business to an independent with a high payout, a broker can almost double their income overnight.      

Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com

Share This Article linkedin