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Stifel CEO: Broker Protocol 'will unravel'

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Without the support of the largest firms, the Broker Protocol won't hold up, the CEO of Stifel said, increasing the possibility that the industry will revert to a more litigious pre-protocol recruiting era.

Ron Kruszewski's comments came after hours after Morgan Stanley announced its abrupt departure from the accord, which immediately raised questions as to whether Merrill Lynch, UBS and others would follow suit. The wirehouse, which has over 15,000 advisors, cited what it saw as unfair loopholes in the protocol.

"My personal prediction is that protocol will unravel. The largest firms brought it [into existence], and the largest firms will take it out," Kruszewski told analysts Monday during an earnings call.

Should the protocol collapse, then it will almost certainly increase litigation, Kruszewski said, echoing similar comments from other industry insiders and observers.

"If Merrill pulls out and UBS follows, then yes [it'll collapse]," says recruiter Michael King.

Spokeswomen for Wells Fargo and Merrill Lynch declined to comment on whether their firms would stay in the protocol. A UBS spokeswoman could not be reached for immediate comment.

The agreement came into effect in 2004 as an attempt to rein in unnecessary litigation; pre-protocol, firms regularly filed suits against departing brokers and rival firms.

"It was much more litigious. It was crazy," says Tom Lewis, an attorney with law firm Stevens & Lee.

But the recruiting landscape has changed dramatically since the protocol was signed by a handful of wirehouses. Independent broker-dealers, regional firms and breakaway RIAs are much more powerful recruiting forces today.

Independent and regional firms have been maintaining strong appeal with new recruits.
October 3

Indeed, some recruiters suggest that Morgan Stanley's move is aimed at cutting its advisor losses to regional firms and breakaways. Companies like Raymond James, RBC Wealth Management and Janney Montgomery Scott have been notching record hiring numbers. Their wirehouse competitors have been reporting net declines in headcount.

The protocol's membership, meanwhile, has grown from a few wirehouses at its inception to over 1,600 members today. The accord is administered by law firm Bressler, Amery & Ross. "The largest firms came up with the protocol and, in my view, in their self-interest in not only reducing litigation but to help with recruiting. As they decide not to recruit anymore, it doesn't surprise me that they would want to exit the protocol," Kruszewski said.

Morgan Stanley is set to leave Nov. 3. It's not clear what the firm will do to advisors who quit for rivals after that date. A spokeswoman was unavailable for immediate comment.

Morgan Stanley could face legal challenges if it attempts to block departing advisors from contacting clients, says Lewis, the attorney.

"I would think a court, a judge, or an arbitration panel would look at this and say, 'Why was it okay to hire someone under the protocol in November 2016, but not okay in November 2017?'" Lewis says.

Kruszewski raised a similar point during the earnings call.

"I'm struck by the fact that if you recruit a bunch of people under protocol, then you say you can't leave because we're changing the rules," Kruszewski said.

Stifel has been among those firms that have aggressively courted wirehouse advisors. The St. Louis-based brokerage has picked up a number of large teams.

Although he foresees more lawsuits being filed if the protocol collapses, Kruszewski didn't think that would significantly harm the company's hiring efforts.

"We've always tried to be a firm where you want to come in and work and want to stay. We think that will win over the long run over some of these hurdles that are being put in place," Kruszewski said.

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