Fewer companies join Protocol as downsides emerge

By the end of 2010, the number of companies signing on to the Broker Protocol had slowed to a trickle, and it could stay that way for a while.

Five firms signed the protocol in December, compared with 15 in December 2009. In all, 189 firms signed the protocol in 2010, a steep drop from the 280 that signed in 2009. As of December 30, the total number of protocol signatories was 595. For a complete listing, see the link at the upper right of the RIABiz Directory

The trend is not surprising, says Robert Ross, senior counsel at New Jersey-based Hamburger Law Firm. Most firms know about the protocol, the rules of engagement for advisors leaving one firm to join another or start another. And many of those who see a strategic benefit in signing on have already done so, says Ross.

“It’s a natural slowing down of the process,” he says. “Most of the sophisticated players in the market are well aware of the protocol’s benefits and potential drawbacks for their business.”

An advisory firm that joins can more easily recruit brokers from wirehouses, because the Protocol gives departing brokers a way to bring their books of business along, if they follow certain steps such as not taking client files with them. Yet, the agreement, designed as a sort of no-fault recruiting truce, can work the other way, too. A signatory firm may end up having an advisor recruited from it.

New signatories

The companies that joined the Protocol in December were:

Transamerica Financial Advisors, Inc.

Hudson Capital Management, LLC

Tehrani Wealth Management, LLC

Capital Financial Group, LLC

Efficient Market Advisors, LLC

Here’s a full list of Protocol members. For information about how to join, see: Which firms are joining the Broker Protocol, and how your firm gets on the list.

The largest company to join the Protocol this time around was Transamerica, which according to its web site is a St. Petersburg, Fla.,-based IBD with nearly 1,600 registered representatives and nearly 1,000 branch offices nationwide.

Efficient Market Advisors, LLC, joined the protocol in December when it was considering hiring an advisor away from another firm, says Herb Morgan, who founded the business seven years ago.

The firm, which has $170 million of assets under management, ended up not hiring the advisor. But Morgan says joining the protocol is worth it for its legal protection. Efficient Market Advisors, in Camino Del Mar, Calif., actively recruits advisors once or twice a year, Morgan adds.

Morgan admits that he had not heard of the Broker Protocol before the firm’s lawyers brought it to his attention during the firm’s recent advisor courtship. While RIA firms are usually aware of the protocol, many of them mistakenly believe it pertains only to brokerage firms, says Ross.

The protocol was created in 2004 by brokerage firms Merrill Lynch, UBS and Smith Barney, and it’s colloquially known as the Merrill Protocol. But it has since been adopted by advisory firms as well, and is open to any financial services firm.

New signup activity is likely to continue to be moderate in 2011—barring a surprise, says Ross. In the past, the decisions of individual large firms have created spikes in the number of firms joining the Broker Protocol activity.

After A.G. Edwards was acquired twice, many of its advisors jumped ship and sought to bring their clients along. Wachovia’s merger with Wells Fargo created more firm-hopping and breakaways, as did the Bank of America/Merrill Lynch merger. Ditto for UBS’ offshore-account scandal.

Another scenario in which protocol signings might surge would involve the economy and the markets becoming very strong—or very weak, suggests Ross. Such environments have a way of shaking free advisors, who jump to other firms or start their own, he says.

“If there are brighter skies in 2011, people may feel comfortable enough to say, ‘This is my year,’” he says.