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  • Rebecca Frosch

What is a Broker Protocol Firm?

Broker Protocol is a key element in the financial services industry that facilitates the smooth transition of financial advisors from one firm to another. Established in 2004, it was designed to provide legal guidelines that protect both the advisor and their clients during these transitions. Quite simply, they tell you what you can and can't do when moving to a new broker-dealer. In this article, we will dive into what Broker Protocol is, its significance, and what it means to the industry's landscape.


What is The Broker Protocol?

The Broker Protocol is an agreement among a group of financial firms that establishes a standardized procedure for advisors who want to switch Broker-dealers. Initially signed by three major firms - Merrill Lynch, Smith Barney (now part of Morgan Stanley), and UBS. The Protocol has since been adopted by hundreds of firms, ranging from large institutions to smaller independent broker-dealers.


The primary purpose of the Broker Protocol is to minimize litigation related to advisor transitions by outlining what information advisors can take with them when they move. This includes client names, addresses, phone numbers, email addresses, and account titles. In return, the departing advisor must leave behind a copy of this information with the old firm.


Why Was the Broker Protocol Created?

Before the Broker Protocol, transitioning advisors often faced significant legal challenges. Firms frequently sued departing advisors for taking client information, alleging violations of non-compete and non-solicitation agreements. These legal battles were costly and time-consuming for all parties involved and often left clients in a state of uncertainty.


The Broker Protocol was created to address these issues by providing a clear set of rules that both advisors and firms could follow. This framework helps ensure that advisors can maintain their client relationships without fear of litigation, while firms retain the right to protect their business interests.


Key Guidelines and Rules Outlined by the Broker Protocol


  1. Information Advisors Can Take - When an advisor leaves a firm that is a signatory to the Broker Protocol, they are allowed to take the following client information:

  • Client Name: Full names of the clients

  • Address: Home or business addresses of the clients

  • Phone Numbers: Primary contact phone numbers for the clients

  • Email Addresses: Clients' email addresses

  • Account Title: The titles of the accounts the advisor managed at the old firm

  1. Notification Requirements - The departing advisor must provide a written resignation letter to their branch manager or another designated supervisor at the old firm. This letter should specify that the advisor is resigning and moving to a new firm that is also a signatory to the Broker Protocol.

  2. Handling Client information

  • Retention of Copy: The advisor must leave a copy of the client information mentioned above with the old firm when they depart

  • No Additional Data: Advisors are prohibited from taking any other documents or information, including account numbers, client financial details, or any proprietary information belonging to the old firm

  1. Client Contact

  • Client Notification: After the advisor moves to the new firm, they are allowed to notify their clients of their new location and provide them with contact details. The communication should be factual and not solicit clients in a manner that violates the terms of the Protocol

  • No Solicitation Prior to Resignation: Advisors cannot solicit clients to move their accounts to the new firm before they have formally resigned from the old firm

  1. Adherence to Legal and Contractual Obligations

  • Non-Compete Clauses: Advisors must still comply with any non-compete or non-solicitation agreement they may have signed, as long as these do not conflict with the terms of the Broker Protocol

  • Confidentiality: Advisors must maintain the confidentiality of any proprietary information and trade secrets of the old firm

  1. Transition Process - The goal of the Protocol is to ensure a smooth transition for clients, minimizing any disruption to their relationship with their advisor. Both the old and new firms are encouraged to facilitate this process in good faith.

  2. Litigation Avoidance - By adhering to these guidelines, both advisors and firms aim to avoid litigation. If disputes arise, they are typically resolved through the legal mechanisms specified in the employment contracts.


Benefits of the Broker Protocol

  1. Client Continuity - One of the most significant benefits of the Broker Protocol is the continuity it provides to clients. When advisors change firms, clients can follow their trusted advisor without disruption to their financial plans and strategies.

  2. Reduced Litigation- The Protocol reduces the likelihood of legal disputes between firms and advisors. By adhering to the established guidelines, both parties can avoid costly and protracted lawsuits.

  3. Advisor Mobility - The Broker Protocol enhances the mobility of financial advisors, allowing them to seek better opportunities and align themselves with firms that better match their career goals and values.

  4. Firm Reputation - Firms that are signatories to the Protocol can attract top talent by demonstrating their commitment to fair practices and advisor-friendly policies.


The Impact on the Financial Industry

The Broker Protocol has had a profound impact on the financial services industry. By simplifying the transition process, it has encouraged a more dynamic and competitive environment. Advisors are more empowered to make career moves that benefit both themselves and their clients, while firms are incentivized to create attractive working environments to retain their top talent.


However, the Protocol is not without its critics. Some firms have chosen to withdraw from the agreement, arguing that it undermines their ability to protect proprietary information and maintain client relationships. These firms believe that the Protocol places them at a disadvantage, particularly when competing for high-net-worth clients.


Conclusion

The Broker Protocol has played a pivotal role in shaping the industry by promoting advisor mobility and client continuity. While it is not without its challenges, the Protocol remains a vital tool for facilitating smooth transitions and reducing litigation risks.


To find out if your firm is part of the Broker Protocol, go to this link provided by J.S. Held. They maintain the only official list of signatory firms and the list is updated weekly.


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