Effective this Friday, Morgan Stanley is pulling out of the industry’s broker recruitment protocol.
The recruitment pact was created in 2004 by Citigroup, Merrill Lynch and UBS to reduce the amount of litigation over non-compete agreements, and by most accounts it has been successful. Many firms viewed it as a means to reduce costs transition costs and curtail negative client experiences when a broker moved firms.

Morgan Stanley's decision could make it more difficult and expensive for its brokers to leave. In return, that could require competitors to offer more lucrative incentives to recruit them.
The voluntary agreement lets advisors take customer contact information when they move from one protocol signatory to another. Smith Barney, the predecessor firm to Morgan Stanley’s wealth management business, signed on in 2004.
But in a statement on Monday, Morgan Stanley said the deal no longer works.
Firms have “have opportunistically joined the Protocol to make a strategic hire and then dropped out,” Morgan Stanley said, and have also used legal tricks to circumvent and create exceptions to the agreement. “In its current state the Protocol is no longer sustainable.”
Morgan Stanley said it would instead “invest more heavily” into retaining and supporting its existing advisors. Aside from retention and support, it's not clear whether the move means Morgan Stanley will become more aggressive and generous in recruiting and adopt a more punitive stance towards brokers who leave the firm.

If other firms follow Morgan Stanley, it could mean a return to the days of big signing bonuses, generous forgiveable loans and contentious battles over clients when brokers switch firms. One reason the protocol was adopted was that clients were sometimes treated in a shabby fashion when caught in a battle between two firms. Litigation expenses also could escalate out of control.
“If you’ve been a net winner in the recruiting wars, rather than a net loser, you don’t do this,” says Danny Sarch, an industry recruiter and founder of Leitner Sarch Consultants. “I think clearly it’s an acknowledgement of that.”
Over the past five years ending in June, Morgan Stanley’s advisor count has fallen from 16,478 to 15,777. However, its welath management unit has been a major source of profits, so that may have prompted its executives to decide to spend more.
“If you look at [advisor] migration, it’s undeniable that the flow and the acceleration has been only one way, and that’s to the independent space,” says Shirl Penney, chief executive of Dynasty Financial Partners.
A lot of breakaway RIAs have joined the protocol to make their departure from a wirehouse easier, he says. “I would assume that’s what happened” to spur Morgan Stanley’s change of heart.
“I think they want to scare people into staying,” Sarch says.

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