(Bloomberg) -- Morgan Stanley, the world's biggest brokerage by adviser count, has dropped out of an industry accord that allows financial advisers to defect to competitors without getting sued by their former employers.
The agreement, known as the Protocol for Broker Recruiting, has become “replete with opportunities for gamesmanship and loopholes,” Morgan Stanley said Monday in a statement. Member firms have joined and dropped out of the deal or changed its scope when it suited them, according to the New York-based bank.
“In its current state, the protocol is no longer sustainable,” Morgan Stanley said. “Exiting the protocol will allow the firm to invest more heavily in its world-class advisers.”
Poaching between the four biggest U.S. wealth brokerages has already slowed this year amid new regulations that resulted in smaller recruiting bonuses. In the past, star brokers could get awards of more than three times the annual revenue they generated to join a competitor. Bonuses rose steadily after three competitors -- Merrill Lynch & Co., Citigroup Inc. and UBS Group AG -- created the industry pact in 2004 to reduce litigation when one big firm poached from another. The protocol now has nearly 1,700 members.
Read more: The unanticipated effects of the protocol
It made little sense for Morgan Stanley, which joined the pact in 2006, to remain in the deal because it loses more advisers to competitors than it gained through recruiting, according to Danny Sarch, president of Leitner Sarch Consultants. Morgan Stanley said in the statement that it's focusing less on recruitment and more on internal development.
“I'd be shocked if Merrill and UBS don't follow suit,” said Louis Diamond of Diamond Consultants LLC. “Those are the firms that have the most to lose with this deal after they've all said they're not recruiting as much.”
Spokesmen for Bank of America's Corp.'s Merrill Lynch and UBS declined to say whether the firms would remain in the protocol.
Morgan Stanley's move is the latest meant to slow the industry's revolving door of financial advisers. For years, executives and analysts derided recruitment deals as a zero-sum game that hurt the industry's profitability, because major firms mostly traded top brokers among themselves. Still, that didn't stop companies from paying lavish bonuses to replenish their ranks when advisers crossed the street.
That started to change last year when UBS announced that it would cut recruiting of new brokers by 40 percent. Morgan Stanley and Bank of America followed with similar statements. Now, financial advisers who could once count on monetizing their lists of wealthy clients may find it harder to leave their employer.
“This is a way to try to scare people by saying, ‘We'll try to stop by legal means their ability to leave,'” Sarch said. “While the prospects out there are still good, the question is how painful will it be to leave?”
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net.
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steven Crabill, Larry DiTore
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