What Morgan Stanley’s Move Really Means

Morgan Stanley’s move last week to leave the 2004 broker protocol was big news for the financial industry, particularly for the independent space.

At first glance, the move could mean that advisor movement may slow down, especially if the other wirehouses leave the protocol as well. But if you look underneath the hood here, you could see the possibility of it pushing those thinking about starting or joining an independent registered investment advisor (RIA) or broker-dealer (BD) to hurry up and make their move, quickening the pace rather than slowing it down.

This move by Morgan Stanley could, in fact, be an acknowledgement of the bright future for independence. More and more of the top teams are considering the independent space as their final landing spot, and they’re doing so given today’s fast track to exceptional quality in business design and strategy consulting resources, technology, client services and back office support. As Redtail CEO Brian McLaughlin recently noted, “advisors are not lured to the entrepreneurial landscape of wealth management only to be let down by what they find here. This allure will not diminish anytime soon.”

To help me dig deeper into this debate, I reached out to my friend Shirl Penney, the president and CEO of Dynasty Financial Partners?who specializes in helping high-producing advisors and teams establish their own RIA.

David:?Let’s start with the million dollar question – will this move slow down advisor movement in our industry??

Shirl: No. I don’t think this will slow down the pace of advisors moving to the independent space. In fact, many will likely mobilize quickly before their brokerages leave the protocol as well, which is likely to happen. How effective is a broker protocol if one or several of the key firms are no longer a part of it?

In addition to the pace quickening, I see this move as a very good thing for our industry. This is not a barrier for those contemplating independence – it is just a blip in the road. The absence of the protocol will likely not stop those in pursuit of independence and for many, their dream of running their own business. In fact, I predict most will push through, giving the industry its next crop of bright and driven advisors, many of which are moving to an environment that they feel is better for their clients, employees and families.?

David:?Do you see this as an acknowledgement of the significance of the independent space?

Shirl: Absolutely – this move is a signal that the industry is moving toward independence. There are more advisors going independent now than ever, and with some of the biggest teams in the industry. We are seeing a massive influx of capital and technology flooding the independent space; not to mention that access to product is now practically universal. There are more ways than ever before to let clients, your network and prospects know about your new firm. This means that an increasing number of investors are now recipients of independent advice and are talking to their friends about it. The road to independence for the investor and for advisors will only get broader from here.

David:?That’s a good segue to talk about the role of the investor in all of this. I’ve heard you say that the breakaway client movement is now as strong as the breakaway advisor movement. What do you mean by that?

Shirl: It’s important to remember that the end client of today is very different than the end client of 2004 (when the protocol was established). Today’s investor has a very different level of sophistication and understanding of our industry post-financial crisis. They value relationships and want their advisors to sit on the same side of the table.?The ongoing movement toward separating where advice is given from where products are manufactured or sold will continue. It will be interesting to see how today’s clients react if they come to feel their advisors are restricted in doing what’s best for them or their families because of fear around a move.?This has potential to be seen as a negative with end clients over time. The organic growth in the RIA space has only accelerated over the past several years as clients, along with advisors, are exceedingly choosing independent advice delivery.?Let’s see if these moves by the wirehouses cause even more clients to seek independent advice.?I suspect it will.

David:?How do you think this is going to change the culture and business models of the larger firms?

Shirl:?I believe that it is going to be the longer term effects on the brokerages that will be interesting to watch. We will likely see changes to compensation plans in the near future (in fact, we are already seeing signs of this play out). Changes to salary and bonus programs are not too far out as advisors slowly turn into relationship managers covering the “firm’s” clients. This will change the culture further from what used to feel more like a partnership between firm leadership and the advisors who were the heart and soul of the business.?We fundamentally see the business differently at Dynasty in that the more entrepreneurial the firm, the better growth prospects for the business; and that growth typically fuels more resources for client service.?Lastly, people don’t want to be led by a sense of fear.?They want to be inspired and to have a partner that is helping to take their business to the next level.?These moves may, for some, simply add to a boiling over point, further driving them to move when the feeling of partnership is gone.?

David:?What is your recommendation to advisors thinking about making a move given this news?

Shirl: This is an instance in life where experience matters.?Get yourself a platform partner that has done large and complex moves; someone who has seen all types of transitions where you can benefit from that experience.?

Coupled with that will be access to a good lawyer/counsel who has experience with non-protocol departures. Incidentally, there is a well-worn path in this area.

Also, educate yourself. Look into why firms are making these decisions and what it means for you and your clients, with clients being the key here – don’t lose sight of the best interest of those individuals that our industry was set up to serve.

Lastly, talk to a top tier clearing and custody provider who can educate you on their roles and how they can help provide peace of mind to your clients. The combination of entrepreneurs servicing and supporting other entrepreneurs has really led us to say we get to live our American dream by empowering others to live theirs.?

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