Morgan Stanley could do little but watch as a team of advisers overseeing $2.2 billion in assets quit last month to start their own shop, the latest in a string of departures that have shifted billions of dollars in assets away from big Wall Street banks.
After months of secret and meticulous planning, 13 employees in Wichita, Kansas, left on a Friday with phone numbers and e-mail addresses for 800 clients, and then spent a frantic weekend on the phone trying to get them to switch to their upstart. It all depended on a gift from Morgan Stanley: Years earlier, the bank had signed away its right to sue.
The defectors who started the firm, 6 Meridian, were able to take clients with them thanks to an industry agreement called the Protocol for Broker Recruiting. The pact was devised in 2004 by three firms -- Merrill Lynch & Co., Citigroup Inc. and UBS Group AG -- in the name of reducing litigation and giving customers a choice when one big firm poached from another. Morgan Stanley, which declined to comment, joined the protocol two years later.
But over the years, the protocol has had an unanticipated effect by offering a blueprint to brokers with an entrepreneurial bent: have someone set up a shell company, have the company sign the protocol, and then take over the company without fear of a lawsuit.
Maneuvers like 6 Meridian’s explain why the legal peace treaty now has almost 1,500 members, even though the industry has only a handful of big national players. They also help explain a curious trend. In the years since the protocol was born, the old-school “wire houses” that started the pact have lost market share as small upstarts have gained.
Big defections have hit several large banks over the last two years, with Bank of America Corp. and Deutsche Bank AG each losing $3 billion teams to upstarts. There are even websites that track the defections.
The unintended consequences are straining the agreement, with some big firms like JPMorgan Chase & Co. reinterpreting it or even partly opting out.
Earlier: JPMorgan Accused of Double Standard on Broker Poaching
“Originally, the big boys formed the protocol and the smaller shops joined in,” said Jonathan Pollard, an employment attorney in Fort Lauderdale, Florida. “Now the ones pushing back are all big players.”
Brian Hamburger, a lawyer in Englewood, New Jersey, who specializes in helping brokerage employees go independent, figures he’s left his “fingerprints” on as many as one-third of protocol memberships, including 6 Meridian’s. “We’re working at varying stages with several multibillion-dollar teams. We expect more big deals this year,” Hamburger said.