Wall Street dethrones wealth managers

Big banks pull out of near industry-wide agreement not to sue one another when brokers jump ship for a rival

Wall Street dethrones wealth managers

By John Foley

NEW YORK(Reuters Breakingviews) - The global shift from collaboration to insularity is happening in miniature on Wall Street. Citi, Morgan Stanley and UBS have all pulled out of a near industry-wide agreement not to sue one another when brokers jump ship for a rival. Bank of America , for now, is sticking with it. Shareholders won't miss the so-called broker protocol, but wealth managers definitely will.

The agreement is effectively a ceasefire drawn up between big firms in 2004. When brokers go from one signatory to another, they can take basic client data and contact their old customers without getting sued, in theory. For companies constantly losing and hiring staff, what was lost from one hand was gained on the other. Clients were happy, because they could move with their adviser without having to fill in a wodge of new paperwork.

Two things changed. The protocol mainly benefits aggressive hirers, and most big firms are now more focused on retaining staff rather than adding to their ranks. UBS, Wells Fargo and Morgan Stanley have shed financial advisers on a net basis over the past five years, according to UBS analysts. Meanwhile, the rules were getting bent out of shape. JPMorgan argued, for example, that staff from its private bank didn’t count as protocol brokers. Financial advisers leaving to go solo added a new headache: by immediately signing up to the protocol they could take clients with them.

For a shareholder, the likely dismantling of the protocol isn’t bad. Sure, there will be lawsuits, but there should also be more pay restraint. Pay had in some cases reached three years' worth of a broker’s revenue. Morgan Stanley’s wealth-management pre-tax margin, which hit 25.5 percent in 2017, could expand by 2.5 percentage points as a result of leaving the accord, UBS reckons.

It's a more ominous development for brokers. Not only will it get harder for them to be poached or set up their own shop. Big firms will also get more assertive about pay, and what their staff can sell and to whom. Financial advisers like to argue that they own the client. Their employers feel otherwise – and by turning their back on the protocol they're regaining the upper hand.

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- Bank of America said on Jan. 17 that it was sticking with a 14-year industry pact that governs what happens when brokers switch firms. Citigroup, Morgan Stanley and UBS all said in late 2017 that they were abandoning the agreement.

- The “broker protocol,” set up in 2004, laid down guidelines under which a broker could move to a rival and take limited client data with them without automatically incurring a lawsuit.

- Bank of America Chief Executive Brian Moynihan told analysts on Jan. 17 that the bank continued to monitor the market, but had not changed its position on the pact.

- The protocol has 1,715 signatories, according to the online directory managed by law firm Carlile Patchen and Murphy. Goldman Sachs and Charles Schwab are two that have not signed.


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