Morgan Stanley & UBS Move Toward Reduced Service for Investors and Increased Lawsuits Against Employees
2017 will no doubt go down in investment history as the begin of the end for the broker protocol, at least as we know it. In late October, Morgan Stanley announced they would be leaving the protocol, and UBS followed suit in late November. The exit of these investment giants surely means a return to both lawsuits against employees and poorer service for investment clients.
The Broker Protocol Peace Treaty
Prior to the Broker Protocol being in place, changing jobs for stock brokers (they sometimes call themselves wealth managers or financial planners) at the major broker houses was a gamble--with a lawsuit as the stakes.
When a broker switched from Morgan Stanley to UBS, their former company would sue the employee for everything from breach of contract to intellectual property theft to corporate espionage. This is because the employee's clients, who trust the person more than the company, would often leave Morgan Stanley for UBS so they could stick with their trusted adviser. Of course, UBS (and every other company) did the same thing to their employees who took a job at Morgan Stanley.
The end result was stock brokers were a sort of modern-day indentured servant who couldn't really exert control over their own career. The real value an adviser brings their firm is the same value an adviser gives to their clients: the relationship between the adviser and the client. By using the threat of lawsuit to sever the relationship with the client, the company could maintain control over their current and former employees. And also reduce the incentive for someone to switch jobs.
The Industry Cease Fire
The protocol was created in response to the rising costs of litigation, increasing consumer complaints, and the threat of SEC regulation. The major brokerage wire-houses (with guidance from the SEC) drafted the Broker Protocol, which is a lawsuit cease-fire of sorts. The protocol states what basic client information (name, address, and phone number) an adviser can take with them when changing jobs without fear of being sued.
Consumer Protections in the Protocol
In a 2008 letter, the SEC cited two major consumer benefits of the broker protocol as well. The protocol ensured (1) "Customer Service and Choice" by allowing the customer to be contacted once by the representative so they could make their own choice about their investment accounts; and (2) "Protection of Customer Privacy Interests" by ensuring only limited and non-sensitive information is taken by the adviser.
Investors Are Collateral Damage in This War
With the exit from the Broker Protocol, Morgan Stanley and UBS have signaled they are going back to war, not just with each other but with their own employees and with every other company in the financial services industry. And in every war there is collateral damage.
Why Advisers Leave Firms
For investors, this means if you have an adviser with Morgan Stanley or UBS, they can't leave for better opportunities at another firm. While "better opportunities" often means more pay, it also can mean the adviser believes they can serve their clients better at a new firm. Some of the many reasons an adviser might think moving to a new company could benefit their clients include:
- Access to cheaper investment products for their clients
- Ability to operate under a fiduciary standard for their clients
- Less busy-work paperwork so they can focus more on client needs
- Not having to "push" clients into the parent bank's mortgage, checking, or other products
- Not having to "push" clients into the parent insurance company's insurance products
- Reducing other conflicts of interest in working with clients
No Protocol Often Means No Choice
What will end up happening to Morgan Stanley and UBS clients is their adviser will one day disappear and they will never know where they went or why. Morgan Stanley or UBS will unceremoniously 'assign' the client to a new adviser and effectively force them into a new relationship.
While companies like Morgan Stanley and UBS will argue investors can always change advisers on their own, the companies definitely will not inform clients of this choice. And you can be sure the companies will do everything they can to reduce the chances clients exercise this choice.
What Investors Can Do
Fortunately, the big companies can't sue their clients for switching their accounts. (Although I'm sure some of them would love their lawyers to figure out how they could sue their clients.) This means you always have the right to transfer your account from the old company to wherever your adviser moved to. The only trick will be to find where your old adviser is.
To take a more proactive role in what happens to you when your adviser changes jobs, there are a few things you should do.
- Ask the SEC to make a broker protocol a legal mandate which companies can't opt out of.
- If your adviser leaves, find them using the SEC and FINRA tools.
- Put your own plan in place to make sure you can maintain the relationship with your adviser.
Contact the SEC
The industry-created Broker Protocol was put in place in response to an SEC proposal to create a legally mandated set of rules for when an adviser switches firms. With major companies leaving the broker protocol it's time for the SEC to revisit a modification to Regulations S-P to make these rules law.
You can ask the SEC to revisit a modification to Regulation S-P to implement a broker protocol which companies must comply with. Or you can e-mail the commissioner directly at CommissionerStein@sec.gov.
Research the Adviser on Broker Check
If your adviser disappears abruptly, there are two possible reasons. Either they had a legal/ethical issue which got them fired, or they moved to a new company and threat of lawsuit is keeping them from contacting you. Either way, you can take charge and find out for yourself what happened.
If there is no regulatory record, then you know the adviser just switched jobs and is likely just afraid of being sued by their old employer. Their listing will also include their new contact information. You can simply call your old adviser and have them help you move your account over.
Begin a Conversation With Your Adviser Now
If you currently have a strong relationship with your adviser and want to keep them, then take charge of the conversation by asking your adviser about what would happen if they left their firm. Adviser's cannot initiate plans to take you with them if they move to a new firm, as it would be a breach of their duty to serve as a representative of their current employer. But that doesn't mean you can't put a plan in place in case they left.
Just like you should have a plan for meeting up with your family after a natural disaster, you want a plan for meeting with your adviser in case of a switch. Get your adviser's personal e-mail address or non-work cell phone number and keep the information with your other financial planning documents. Tell your adviser if they were to leave abruptly, how you would contact them to find out what happened and where they went.
They will almost invariably respond with assurance that they are not planning on leaving their current company and this won't be necessary, but secretly they will be happy a plan is in place to maintain the relationship.
Switch To Another Company or an RIA
If you don't have a strong relationship with your adviser, begin looking for an adviser you would want to stick with. Preferably other than at Morgan Stanley, UBS, or another company which exits the Broker Protocol. Begin interviewing advisers to find one you can trust and who you feel has your best interests at heart. Find an adviser with a company which is still in the broker protocol (possibly a difficult task in the future) or has policies for how advisers can contact their clients in the event of a move.
Or even better, choose an independent Registered Investment Adviser firm which not only are more likely to still be involved in the Broker Protocol but also legally have to have your best interests at heart.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career also includes having been a VP at a credit union leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at email@example.com