Ever had to find a new dentist? 

Perhaps the mere thought of finding new professionals makes you anxious. The time it takes to research, the ability to connect personalities, and, of course, the trust factor. Millions of Americans will have to do just this with their broker over the next few short years.  The advice industry suffers from the same “graying” that many industries are seeing but age alone is not the only factor for attrition. Something called “broker protocol” is weighing in on the issue.

What is broker protocol and whom does it benefit?

The protocol was an arrangement created in 2004 to allow brokers to switch firms and allow firms to grab brokers with existing books of business without the cost of legal action over non-competes. A broker at Merrill Lynch, for example, could use the protocol to bring his or her clients to Morgan Stanley. Brokers would often cite better research or technology but ultimately they left one wirehouse and joined another because they were paid in advance for past production. These bonuses were referred to as forgivable loans by the issuing firms. 

A funny thing started to happen as the firms took a close look at their balance sheets. They started to realize that these “loans” were quite costly. One group of brokers would leave and another would come over to replace them but at a much higher cost.  The regulators also took notice as some brokers would sell out of commissioned products at firm A, buy new products at firm B or simply move them to wrap fee accounts. In doing so, brokers were getting paid once for selling the products, again for moving firms, and a then third time for moving those previously sold assets to an ongoing wrap fee. As you can see, the protocol was designed to protect the interests of the broker and the firm, not the client.

The ongoing wrap fee?

It’s the ongoing wrap fee that set this all in motion. What the big firms started to accept was that once clients were paying an ongoing wrap fee, their brokers became expendable. Morgan Stanley booked $2.2 billion of managed account fees in its wealth management division in the fourth quarter of 2016, compared with $774 million of commissions. The $28 billion of advisory fees that its clients paid between 2011 and 2015 was more than triple the $8.7 billion of compensation it paid brokers last year. 

First, wirehouses stopped recruiting experienced advisers, and then use the guise of the DOL rule to stop offering recruiting bonuses tied to past performance.  The end goal, of course, is to rid themselves of expensive loans, high overhead, and keep as much of the ongoing fees as possible. Leaving the broker protocol means that the broker can’t leave with his or her clients, meaning the clients belong to the firm. Now, any broker who leaves voluntarily or otherwise cannot do business with their existing clients for a year.

Who is my broker?

What the big firms have been creating, not so secretly, is an army of young, salaried employees in call centers. Their job is to attempt to service clients left behind by exiting brokers. The idea is that what the firm loses in assets can be offset in overhead.

The change is happening and it’s happening fast. Americans will need a succession plan even if their brokers don’t have one.