Q56 – What Is The Broker Protocol?

Also available as podcast (Episode #56)

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What is the Broker Protocol?

The Protocol For Broker Recruiting, as it is formally known, is a tool available for some financial advisors to use while transitioning from one firm (broker/dealer, RIA, etc.) to another.  If all of the terms of the protocol are satisfied, it provides a way to reduce the litigation risk when making such a transition.  Over time, various carveouts and changes to the protocol have expanded it’s complexity well beyond what is was originally envisioned to be.  Nonetheless, for advisors eligible to utilize it’s protections, it is a worthwhile tool to be aware of and consider using when making a transition.

Show Notes

Capital Forensics (website)

Eric Siber contact info ([email protected])

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Full Transcript:

Brad: What is the Broker Protocol? That is today’s question on the “Transition To RIA” Question and Answer series, it is question #56.

Hi, this is Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition to the RIA model.

In today’s episode, we’re going to be talking about a topic related to that latter part, how to transition to the RIA model. There are a lot of variables that go into that – I’ve made a lot of episodes covering a lot of those topics. But on today’s episode, we’re going to talk about a very specific tool – for lack of a better term – called the Broker Protocol that is available to some advisors. Based on what we’re going to talk about, you’ll understand why I don’t say all advisors, but for some advisors it is an available tool to help with a transition.

And so we’re going to be diving into anything and everything Broker Protocol. For that, I have a wonderful guest on today, Eric Siber with Capital Forensics. Eric, thank you for joining today.

Eric: Thank you for having me, Brad. I appreciate it.

Brad: A couple quick housekeeping things before we get into the questions.

There are a couple reasons Eric is a wonderful guest to help us with this topic. First, his firm, Capital Forensics, is the recordkeeper of the Broker Protocol. We’ll dive into what that means, but being the recordkeeper is well dialed into all things protocol.

And then, Eric himself is called upon at times to be an expert witness on this exact topic. So, on an individual basis, very well versed as well.

I’m excited to have Eric on to help us with this topic.

While I refer to it as the Broker Protocol – and Eric, you feel free to refer to it as you customarily do – the official name is the Protocol for Broker Recruiting. So to be clear, that is the official title, but it is commonly referred to as the Broker Protocol. So that’s what you’ll hear me referencing. But just to be clear, there’s a formal name to it as well.

Before we dive into the questions, Eric, if you could give a little background on yourself and your firm, I think that would be helpful.

Eric: Sure. Thanks, Brad. I appreciate the introduction.

I spent 35 years on Wall Street in various capacities: financial advisor, branch manager, complex director, head of the private client group. I’ve always been in the front office, and frankly, have always been involved with recruiting.

I left Wall Street, my last firm was RBC Wealth Management, in 2016 to join Capital Forensics, at which time I became a managing director with the firm. Capital Forensics is not quite 30 years old. We do litigation support, regulatory consulting…and in 2017, we took on the role of the administrator for the Broker Protocol.

Brad: Perfect. A lot of depth and experience there to be certain. So again, a wonderful guest to have help us with this. Thank you for coming on.

At a macro level, for folks that aren’t familiar with it, please start by telling us what is the Broker Protocol? What’s the purpose of it existing? How is it functionally utilized in a transition? If you could start at that macro level, I think that would be helpful.

Eric: Sure, thanks. For those of you who have been around for a while, you probably remember temporary restraining orders. Every time a broker left the firm, the former firm, the firm from which he or she left, issued a temporary restraining order preventing them from trying to move their book, even contacting their clients.

Back in 2003, the protocol was started to allow clients the freedom to have their accounts serviced where they wanted without the interruption, whether from litigation or temporary restraining orders against the broker who left his or her former firm. The intent was to reduce litigation costs. As long as the financial services provider, the financial advisor, follow the written rules of the protocol and follow its provisions.

If you were leaving a protocol member firm to go to a protocol member firm, as long as you follow a certain set of rules, you can go, no TROs, no litigation. Nobody’s trying to stop the client from leaving other than perhaps the former firm reaching out to the client to say, “Mr. or Mrs. Smith, we’d love you to keep your business here. What would it take to keep you?” But other than that, there were no restrictions.

Brad: Anyone that is interested in trying to utilize the protections of the protocol will want to talk to a firm like yours or an expert like you. So we’ll keep this high level. But if I’m correct, there are specific protocols that have to be followed, specific information you can and can’t take. And to have that protection you just described, that has to be followed to a tee, is that correct?

Eric: That is correct. There are several rules for the protocol.

By the way, on our website is the entire rule, the protocol itself. So if anybody goes to CapitalForensics.com, upper right corner, you’ll see the words Broker Protocol. Click on that. It will tell you everything you ever wanted to know about the protocol, including the signed agreement itself.

But basically, there are two requirements.

One is that the departing broker must give his or her branch manager a list. The list must contain the client names, the clients that they’re taking, the titling of the account, the home address, the phone number, and the email address. So might be Eric Siber IRA, Eric and his wife Siber joint tenants with rights of survivorship, our names, our phone number, our email address, our home address, and the title of the account.

The list that they give to their manager must include my old account number. However, they are precluded from taking that account number to the new firm. So, to the new firm, they can take five of the six columns, if you will, with the same information. But you must leave the manager the account number, so that he or she, your manager, can quickly disseminate the information to the appropriate parties and have the correct account number.

Brad: We’re going to talk about who is or isn’t part of the protocol, or who could join it and those sorts of things, but if you have the luxury where both parties are members to the protocol, you can benefit from it. The key is play by the rules though because the minute you step out of those rules, then you no longer have these protections.

That would certainly be a shame because not every advisor has the ability to benefit from the protocol because their current firm, or their future firm, might not both be members. And so if you are eligible, it’s a wonderful thing to assist with the transition, but you want to follow it specifically.

You mentioned 2003 is when it started. If I’m correct, it was a half dozen firms, or a very small number of firms originally, primarily wirehouse firms. Is that correct?

Eric: Yeah. I’m sorry, it was actually signed into as an agreement in 2004, but they began kicking it around in ’03.

It was created by three wirehouses, which was Merrill Lynch, UBS – who had just become UBS, formerly PaineWebber – and Citibank Smith Barney. So those were the three signatories, if you will, to the protocol.

They agreed, “Look, you’re suing me, I’m suing you. We’re getting in the way of our clients, my broker is going to your firm, your broker is coming to my firm. Why don’t we just have an agreement that if we follow the set of rules that we lay out, we’ll stop suing each other? We’ll save on litigation costs, we’ll save on interrupting clients who want to go with their financial advisor, so that they can choose to do business where and how they want.”

That was the basis of it. There were only 3 members in 2004. And interestingly enough, by the end of ’06, 2 years later, there were 18 members. And then in 2007, 21 new members joined. So suddenly, everybody started to think, “This thing makes sense. Why sue each other? I’ll become a member of the protocol, we’ll all follow the rules, and then we don’t have to sue each other.”

By 2007, they had upwards of 40 members, and it continued to grow over the years. As of the most recent count we have over 2000 broker dealers, and registered investment advisors, and hybrid financial services from duly registered firms, etc., as protocol members.

Brad: That is some growth, from 3 to over 2000. I think it’s fair to say the original signatories of it, or the original inventors, for lack of a better term, probably did not envision its current state.

We’ll get to how some firms have left the protocol, but is there any limitation to who can join it? While originally it was maybe thought of as a broker dealer type thing, is there any limitation to who can join the protocol, such as RIAs?

Eric: No, any financial services firm can join. I don’t think that was their intent. They weren’t looking to become the pioneers, if you will, of Broker Protocol in recruiting. But it was an agreement among the three of them. As it caught on, people were like, “That makes so much sense, I want to be a member of that.”

There was always an administrator for the protocol. In order to join – on our website is a Joinder Agreement – you simply fill out a Joinder Agreement, email it in, and your membership becomes active the day in which you join. It’s very easy to become a member. You fill out all the information and send it in. However, it has to be, obviously, dated correctly.

As the administrator, we just make sure that the form is filled out correctly to try to help avoid litigation down the road.

If you want to withdraw from the protocol, one of their basic rules, founded in 2004, was you can withdraw today, and it’ll become effective 10 calendar days from today. So, if you send in your withdrawal notice today, it’s intended to become effective 10 business days from now. But there’s no restrictions on who can join.

What we do, by the way, Brad, which I think is important to note, is, because we think it’s important for people to know who joined and who withdrew, we send out two emails a day. If we receive a Joinder Agreement or a withdrawal before noon Central Time, we send out an email to all the members by 1:00 pm Central Time. Capital Forensics is headquartered in Chicago.

If we receive it in the afternoon, then we also will send out a 5:00 pm Central Time email to all members that says, “Attached are the new,” which are often Joinder Agreements. If we don’t have any new Joinder Agreements or withdrawals, we don’t send out an email.

Then every Monday at 1:00pm CST, we send out the complete list alphabetically, year which they became members, withdrawals, etc. and any carve-outs, which we’ll get to carve-outs. So it really is a comprehensive list every Monday. If you are a recipient of that email, you know exactly what’s going on.

Brad: And so clearly more additions than withdrawals. You probably don’t know the number, I wouldn’t expect you to, of how many withdrawals, but there have been a number over the years, it’s fair to say.

I’ll give a little rant because I’m at liberty to do so. And Eric, in your line of work, you maybe have to play a straight shooter. But for advisors watching this, if you are at a firm now that either never signed on to the protocol to begin with, or who signed on at one point and then proactively withdrew from it, it does beg the question, why is that necessary?

If they are providing an environment for you as the advisor that makes you want to stay at their firm, why should they worry about removing some barrier to make it easier for you to leave if they already provide enough satisfaction that you wouldn’t even want to do that?

I think it is telling that firms that either don’t join it or withdraw from it are concerned they will have more departures than they will have arrivals that benefit from it. They feel whatever good it could have for an advisor joining their firm isn’t worth it.

With those firms, there’s more folks leaving. So they’ve put up this guardrail.  When some firms made a withdrawal, they gave some fancy spin about why this was somehow a good thing for advisors. Again, my personal rant…I think that’s an acknowledgement they cannot do a sufficient job keeping their advisors happy to the point they want to stay entirely on their own. The protocol is making it easier for them to leave so they remove themselves from the protocol.

I won’t ask you to make a rant, Eric, because you’re…

Eric: No, I won’t. But one thing that I would add to that, though, Brad, is if a firm is focusing more on retention of its advisors than it is on recruiting, then there might be a good reason why you were not a member of the protocol.

However, there’s always an opportunity to recruit. And therefore, to me, I’ve always worked for protocol member firms and found it advantageous.

Brad: That’s a fair point. There are some firms that do not believe in recruiting advisors from other firms, they only train organic-grown advisors. So that’s a fair point to say they don’t have any utility for it anyways, because they don’t look to bring advisors over. I think that is a fair point in that scenario

But there are certainly firms that absolutely look to attract advisors that have made a conscious decision to either not be part of it, or no longer be part of it. If you’re an advisor at one of those firms, ask yourself why that is.

So next step, I know we’re going kind of high level here in how this works. But there does seem to be some new variations the last couple of years with, I think you used the term carve-out, I’ve also heard partial membership, what exactly is that referring to?

I would have thought it’s firm A is part of the protocol, and that’s all it takes. But apparently, there’s maybe more to it.

Eric: My best example is, let’s say you’re a bank, like Citibank, who has Smith Barney, but Citibank also had branches. Some of these larger banks hired third party marketing people. That’s not specific to Citibank, it was simply an example. But some firms hire third party marketing firms to sit in their local branches, and talk to people who walk into the local branch to sell them anywhere from packaged products, like mutual funds and annuities, up to and including the full range of financial service products.

Some of these banks, as an example, feel that those are their clients, and not the third party marketing person’s. Or from the teller saying, “Smith, why don’t you walk over to talk to the financial advisor over there in that corner? And he or she can help you.”

So they carve out or exempt them from coverage. So even though the bank broker-dealer might be holding their licenses, whether it’s 7, 63, 65, 66, they carve them out to say they are not covered by the protocol. So when they leave, they’re governed by a very different set of rules than when a financial advisor within the bank broker-dealer leaves – whether it’s a full-time employee or an independent broker, provided that they’re covered by the protocol.

Brad: I think that’s a perfect example where, at face value, this should be a simple topic. The reality is, the devil is in the details.

When you are considering making a transition, one of the components you think through is are both sides going to be members of the protocol. And then to your explanation just now, you have to dig a little deeper and make sure that there’s no carve-outs excluding certain scenarios of that firm that may not be part of it, and that may or may not impact a particular advisor.

That’s certainly worth being aware of, and shows that this is a fluid arrangement to a degree.

Eric: There are two things that are worth mentioning here.

The protocol agreement itself has a few carve-outs. Back in ’04 they agreed if this case, if that case, then they may not be covered.

In addition to that, firms themselves have their own carve-outs. They could say anybody – it’s a silly example – but they could say anybody whose last name begins with S is not covered by it. And that carve-out will be in that Monday email that we send out that says, “Firm XYZ is a member. However, here are the exempt employees.”

It could be – you’ll often find this too, by the way – institutional brokers, they’re not part of the protocol. Those types of examples will be in the weekly mailers that we send out as the carve-out that the firm has adopted, rather than the Broker Protocol agreement has adopted.

Brad: That’s why it’s so important that you guys send out the updates as frequently as you do. In theory, an advisor looking to make a transition could look into this, “Oh, my firm’s on the list. I’ll do a ‘protocol transition.'” And then perhaps there is some carve-out added, and unless you’re aware of it at the time you go to make your move, that could create issues.

This is nothing for advisors to be intimidated by or concerned by because you rely on experts like Eric and his team to help with this topic. As you’re watching this now, the takeaway is to be simply aware of these things. But ultimately, you will want to rely on professionals that can help you, right up until the goal line of these different details.

Eric: Right, and the only catch there is we don’t give legal advice, Brad. But we are the administrator of the protocol. And if somebody has a question or wants to find out if XYZ firm has a carve-out, then we’re certainly happy to help.

Brad: Yep. There are some wonderful securities attorneys that can provide that legal advice when it’s needed.

And to be clear, while this is the “Transition To RIA” series, the protocol is not just for RIAs. It wasn’t even originally envisioned for RIAs. It was broker-dealer moves. Now it’s morphed into broker-dealer to RIA moves and all kinds of variations of it.

This episode is certainly relevant to folks in the RIA world, but also folks that maybe their circumstances are such that they’re moving from one broker-dealer to another. But if you are starting an RIA, part of that process can be to set up your own RIA on the Broker Protocol.

If you’re leaving a firm that’s a member of the protocol, again, it has to be two sided. It would be your firm that you’re starting would need to become a member, or if you’re looking to join a particular firm, you would want to know if they themselves are a member.

And so along the lines of joining the protocol, is there a cost involved in becoming a member? And then how long does it take? If next Monday someone wants to submit the paperwork, how long does it take to become active? You talked about someone withdrawing, but what’s the process on the front end?

Eric: There is no cost involved to become a member of the protocol. Once you’re a member, you’re in it for perpetuity until you submit a withdrawal letter.

There’s a Joinder Agreement, which means the broker-dealer or the RIA, the person in contact, the email address, and the effective date, which is the date that it’s signed. We typically just check it to make sure the form is filled out correctly. And then you are effectively a member the day that you joined.

As I said earlier, if we receive the Joinder Agreement afternoon Central Time, then the notification to all members will go out in the afternoon email, which would be the 5:00 pm email. If we receive it before noon Central Time, then it’ll go out with 1:00 pm email, and everybody will know that that new broker-dealer or RIA is a member.

Brad: It’s a pretty quick, efficient process. And to make sure it wasn’t overlooked, no cost involved.

It’s a wonderful thing that Capital Forensics is willing to be the recordkeeper, or administrator I think is the term you used, to make this all possible to do.

One of my final questions, which I’m looking forward to, and not to put you on the hot seat that you have to come up with any creative stories. But as an expert witness called upon to help with this – I presume that’s often in cases where there’s a disagreement after the fact about whether it was utilized correctly or not – any takeaways from your time performing that function of things that are like, “This could have been avoided if you had just done X, Y, and Z.” Any good stories or takeaways from your observations?

Eric: I’ve testified in several lawsuits, as to the rules of protocol and how it works. And whether or not, in fact, there has been a breach of the intent of the protocol.

In one instance, the person left a protocol firm and went to another protocol firm, but joined a team that had a carve-out that said, “You’re an employee of my team, not of the broker dealer. And in fact, you are signing this agreement that says you do not have access to take any of my clients because of this agreement,” it was his team, if you will.

So when the financial advisor joined the team, the other broker-dealer from which he left sued the advisor saying, “No, you’re not a member of the protocol because there’s a carve-out. And that carve-out is actually in the initial protocol agreement.” So they did cover certain areas where, you know, make sure that this isn’t the case.

Another case I was on, somebody left a non-protocol firm to join a protocol firm. The rules are very different. You can hand your non-protocol firm a list of the five necessary topics, as I said, name, address, the title of account, etc., and then say, “Here’s what I’m taking,” and take them. Because as a non-protocol firm, you’re not covered by the right.

There are very specific rules on what you can and cannot do when you’re either going to a non-protocol firm from a protocol firm, or leaving a non-protocol firm to join a protocol firm. So there are specific rules. And, of course, that ends up in litigation.

And then finally, I was in an arbitration recently where one of the carve-outs in the Broker Protocol, they actually said that a member of a team, if they’re on the team for less than four years, they cannot take all the clients that the team covers. If, however, they’re servicing the clients for four years or more, then they are deemed a co-financial advisor. Well, this person wasn’t on the team four years, and of course, litigation pursued.

So, we’ve seen a lot of twists where it’s not as clear, and you leave it up to the arbitration panel to decide whether or not they believe there was a breach of the rules.

Brad: Unfortunately, anytime you’re talking arbitration panels, you’re talking a lot of time, a lot of money to sort that sort of thing out. So clearly, better to try to get it right on the front end and not run afoul of these things.

Thank you for sharing those examples. I think it demonstrates while this is a wonderful tool out there in theory – it’s a pretty simplistic idea, I think the actual document is only two pages itself if I’m correct, so it’s not this encyclopedia long thing – but because of these carve outs and the different scenarios, it’s morphed into something certainly bigger than it was originally envisioned as.

And again, not to intimidate the process at all, but it’s important to know that these details need to be looked into as the advisor. You can rely on professionals that do this day in and day out to help you with that. It’s not something you have to do entirely on your own. But you will want to know, in general, the availability of this and how it works in that regard.

Eric, for folks that want to take a look at the protocol, I think you said it’s linked to on the website? What’s the best way for folks that want to reach out to your firm, or to the degree it would make sense to dive deeper with you, what’s the best way for people to contact?

Eric: [email protected], or information@capitalforensics, they both come to us. Three or four of us receive those emails. My email address is actually on my bio on the website as well. Anybody at Capital Forensics is always willing to help whomever has a question on that.

The one caveat I’d like to add in, if I may, Brad, before we sign off is there are other folks who carry a list of protocol members. Ours is the only official list that is updated twice a day, and other firms may not be aware of all the changes that are going on. So my advice for anybody who is listening is if you google anything other than CapitalForensics.com, you may find a list that may not be through today at noon like ours is. So that’s my word to the wise, if you will.

Brad: That’s great advice. In preparation for this episode, I googled Broker Protocol and came across one of those websites. Thankfully that particular one did very prominently point folks to the Capital Forensics’ website, but I could see where there could be something different.  It’s generally attorneys that are looking to assist advisors with understanding this, and registering for the protocol, and going through a transition. I understand the appeal. But it is important that they are transparent about it, that the ultimate list is directly with Capital Forensics. At the end of the day, that’s the only one that matters because they are the official administrator of it.

I appreciate all that you and your firm do to help with this. And I appreciate you jumping on here today, Eric.

For all the things he mentioned, the website, the email address, I will put all that in the show notes. If you’re not already there, if you head on over to TransitionToRIA.com, you’ll have all of the show notes. You can watch this in video format if you’re not currently, or podcast format. You’ll find all my whitepapers, how to contact me, all those things. Again, TransitionToRIA.com. We will link to everything.

Eric, this has been very helpful. Again, the devil’s in the details. But I think this has been a great start to help people understand what the protocol is and where it might be of help. Thank you for coming on.

Eric: Sure, Brad, and thank you for having us. We really appreciate it.

Brad: Thanks, everyone.

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