Broker Protocol Part II: Who Belongs, Why Firms Keep Changing, and What it Means for RIAs

Click here to read Part I

Who belongs in the Broker Protocol?

The first 10 firms that joined quickly found out broker protocol can be great for recruiting advisors to your firm, but can also open up the floodgates if your advisors are unhappy.?

If you're coming from a broker protocol firm and joining a broker protocol firm, the chances of a Temporary Restraining Order or some type of litigation is conceivably going to be much lower than if you are leaving a non-protocol firm.?In a non-protocol firm, the company can have anything from one standard type of Rep Agreement to a plethora of Rep Agreements where you need an attorney to peruse over all your legal contracts with a fine tooth comb to understand what rules advisors must follow upon their departure.?

Over the past 18 years, firms have joined and then left the protocol agreement based on their ability to attract and retain their advisors. If you're non-protocol it doesn't mean you can't leave your firm. It's just a longer, complicated, more expensive process. In my opinion, life is just easier for clients of advisors at a protocol firm. If their trusted advisor decides to affiliate with a new firm, and they want to continue with the same advisor, the process of transitioning your accounts to the new firm is less restrictive at a protocol firm.

Why have firms been changing between protocol and non-protocol??

It really comes down to two simple schools of thought.?

First, many firms are struggling to grow organically, so they turn to growing inorganically by recruiting established advisors with existing revenue streams and clients that they can bring with them during a transition. Now, imagine you're the recruiter of a non-protocol firm having a conversation with an advisor considering a change of firms. Do you think the advisor wants to join a firm that says, “We make it harder for advisors to leave” or?“We make it easier for advisors to leave?” We don’t get married just to think about getting divorced, but knowing your spouse was going to make a possible divorce much more difficult would probably change your thinking about the marriage going into it.

Second, firms are trying to manage margins to achieve their profitability targets. The most significant expense for financial services companies is what they pay their financial advisors.?Knowing that the industry is expecting a record number of advisors to retire in the coming years, we see a few conclusions emerging:?

• Firms are creating strategies to retain clients, sometimes at the expense of their current advisor, and we’re seeing more advisors be terminated for reasons that leave us scratching our heads.
• New training programs are popping up across the industry, and clients from longstanding advisors with higher payout rates are getting reassigned to different advisors in new programs offering lowering payout rates.?
• Advisors are finding it more difficult to move their practice to different firms because of the restrictions firms are putting in place by exiting broker protocol and limiting the amount retiring advisors receive for the value of their practice.?

How does this impact RIAs??

What we've been seeing is that RIAs are now starting to figure out how to navigate broker protocol and make it easier for advisors to break away from the broker dealer space.?

There are really two common themes we see in the RIA landscape:

The first is that existing RIAs are joining broker protocol to help attract advisors to this space. This way, if an advisor wants to join as an IAR, they follow the broker protocol rules and can "tuck into" an existing firm.?

The other theme is if an advisor files to create their own RIA, they join the broker protocol agreement upon creating the RIA, and then can follow the same rules. The reason this is important is in order to enact the broker protocol process you need to not only be coming from a protocol firm, but also need to join one. So in the event an advisor wants to create their own RIA they might as well join the protocol agreement.?

More importantly, if you're an existing RIA looking to recruit advisors to join as IARs then they'll have an easier transition coming from and going to protocol firms. Keep in mind, just because an advisor is affiliated with a protocol firm doesn't mean they always bring clients with them as they might have subjected themselves to non-solicits, non-competes, etc. (Think of an advisor who joins a team at a protocol firm and just services some of the clients, or an advisor sells a portion of their practice to another advisor, and it has a non-compete for them after they sell.)

In the final part of our 3 part series on themes surrounding broker protocol, we discuss potential impacts to your client relationships,?the value of your practice and ability to choose the fate of the next advisor that ultimately becomes the successor to your business.

Click here to read Part III