Morgan Stanley and UBS – two of the largest wirehouses in the United States – recently withdrew from the Protocol for Broker Recruiting Agreement, commonly referred to as the “Broker Protocol.” This move has raised much speculation as to whether other firms will follow suit. A domino effect of departures could lead to the demise of the Broker Protocol and the relative ease it has afforded advisors for over a decade to take their clients with them when switching firms or going independent without violating restrictive covenants against solicitation and competition or regulations that protect the privacy of client information.

The Broker Protocol is a voluntary agreement among member firms that sets forth guidelines for when and how departing advisors can solicit clients to transfer their business without the fear of being hit with lawsuits or restraining orders. Such costly, and sometimes protracted, legal battles over clients – and control of management of their assets – were commonplace before 2004, the year Merrill Lynch, UBS, and PaineWebber agreed to a cease-fire that essentially sanctioned the practice of luring each other’s most profitable producers. Morgan Stanley joined two years later. Since then, the Broker Protocol has become widely accepted in the brokerage industry with hundreds of firms of all sizes signing on over the years. It currently has more than 1,700 active members.

Therein lies the problem, according to statements by Morgan Stanley and UBS. Morgan Stanley – the largest of the big four wirehouses by headcount – withdrew from the Broker Protocol effective November 3. UBS withdrew effective December 1. Morgan Stanley cited as a primary reason for withdrawing the fact that smaller competitors have been increasingly taking advantage of loopholes in the Broker Protocol and gaming the system in ways that defeat the original objective. The Broker Protocol has allowed these smaller competitors to poach talent from the big wirehouses with very little movement in the opposite direction. This net loss has made the Broker Protocol unsustainable for firms like Morgan Stanley and UBS, who are now focusing their energy and resources on retention rather than recruitment. In the current environment, where the largest firms are desperate to retain their best talent, there may be little to no incentive to remain in the Broker Protocol. The timing of Morgan Stanley’s announcement of its withdrawal, which gave its employees only four days to leave while still under the protection of the Broker Protocol, is a tacit acknowledgement of its concern over losing top advisors to the competition. That did not stop several high-profile departures from Morgan Stanley and UBS, accelerated to beat the clock running out.

We may see a return to pre-Broker Protocol days, where firms regularly sued each other when an advisor made the change from one to the other. This is likely to be the case with Morgan Stanley and UBS. Neither one would have dropped out of the Broker Protocol without the intention of enforcing rights under non-solicitation and non-competition agreements that the Broker Protocol overrode. The risk of litigation will make it more difficult for advisers to leave non-member firms. There will be less certainty over the amount of business an advisor will port to a new firm. Upfront recruitment bonuses and compensation packages may take a substantial cut to account for expected legal expenses.

For the time being, Merrill Lynch has said that it will remain in the Broker Protocol. Wells Fargo, the fourth of the largest U.S. wirehouses, has not given any indication that it intends to leave. However, if one or both withdraw in the near future, all bets are off. Everyone will have to tread carefully and plan wisely to protect their interests in the trillions of dollars of AUM that are at stake.