Understanding How Broker Protocol Impacts Financial Advisors

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Moving to another firm or leaving your company behind to start an advisory business can be the beginning of a new phase in your career. If your current employer is a broker-dealer operating under Broker Protocol standards, there are certain compliance requirements you’ll need to meet as you move through this transition. The Broker Protocol was designed to protect both advisors and firms, as well as minimize any disruptions for clients. Failure to adhere to the protocol could also add some legal wrinkles to your transition process.

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What Is the Broker Protocol?

The Broker Protocol is a formal set of rules and standards governing recruiting and what registered representatives can and cannot do when moving to a new broker-dealer. These rules were established in 2004 through a combined effort by Merrill Lynch, UBS PaineWebber and Smith Barney (now Morgan Stanley).

In creating the Protocol, the founding firms attempted to curb litigious activity surrounding the movement of registered representatives — and their client information — from one firm to another. Before the Protocol was introduced, it was common for broker-dealers to have to initiate legal action against a transitioning advisor and/or their new firm.

That included filing lawsuits, sending cease and desist letters, and enacting temporary restraining orders to slow the advisor’s transition and, more importantly, retain the advisor’s clients. The intent behind the Broker Protocol was to make these types of moves unnecessary by outlining a uniform set of rules that advisors and firms must follow regarding recruiting and changing firms.

Who Is Subject to the Broker Protocol?

The Broker Protocol applies to broker-dealers and registered investment advisors of any size. Joining the Protocol is not a requirement for SEC registration, and firms can choose to join or leave at any time. Notably, two of the founding members (UBS and Morgan Stanley) have both exited the Protocol in recent years.

Joining the Protocol is simply a matter of signing a joinder agreement and returning it to the administrator of the Protocol. Firms can submit a letter of withdrawal to leave the Protocol. As of April 2024, there were just under 2,500 member firms. J.S. Held administers the Protocol and maintains a full list of member firms on its website.

When the Protocol applies to an advisor’s transition from one firm to another depends on membership. Both the advisor’s previous firm and the new one they’re moving to must be members at the time the transition occurs for the advisor to reap any benefits under Protocol rules.

What Does the Broker Protocol Do for Advisors?

The Broker Protocol allows advisors to take certain client information with them when they move to a new firm or leave their current firm to start their own financial advisory business. Specifically, you’re allowed to take:

  • Client names
  • Mailing addresses
  • Email addresses
  • Phone numbers
  • Account titles

You can use this information to solicit those clients to your new firm once the transition is complete. That can make it much easier to build out your book of business with your new employer or your own business, without having to start from scratch.

The Broker Protocol does not allow you to take information beyond these details. That includes account numbers or copies of financial statements related to client accounts. Note that you’re also barred from attempting to solicit clients before you’re employed by the new firm.

Broker Protocol Compliance Requirements

Staying compliant with Broker Protocol rules can help you avoid the threat of a lawsuit when you’re ready to move on to a new firm. There are three distinct tests that determine when you must adhere to the Protocol and how to maintain compliance:

  • Your old firm and your new one must both be members of the Broker Protocol at the time you transition employment.
  • You must provide the specified client information that you’re taking to the firm you’re leaving.
  • You and your new firm must adhere to Protocol rules regarding the use of the client information you’re taking with you.

If you’re unsure whether your old firm and your new one are members of the Broker Protocol, you can check with the current Protocol administrator.

You’ll need to submit your resignation in writing and detail all of the client information you’ll be taking with you. You’ll also need to give your soon-to-be-former employer account numbers for each client whose information you plan to take during the transition.

Your new firm cannot use the client information that you’re bringing with you for any purpose. Only you are allowed to access it when attempting to solicit your old clients to follow you to your new company. This measure is designed to ensure compliance with SEC Regulation S-P, which governs client privacy.

How Advisors Can Prepare for a Job Transition

If you’re preparing to move on to another firm or go independent, there are some best practices to consider to ensure your compliance with the Broker Protocol. Here are a few tips to keep in mind as you ready yourself for the transition.

  • Check the Protocol status for the firm you’re leaving and the one you’re planning to transition to.
  • Prepare a list of client account information to submit with your resignation.
  • Organize the client information you’re allowed to take and verify that you’re not including any prohibited details.
  • Return anything to your employer that may include prohibited information, such as a company-issued phone or laptop.
  • Wait to announce your resignation as close to your departure date as possible.

You may want to talk to an employment attorney if you have questions or concerns about how the Broker Protocol applies. Scheduling a consultation can minimize the possibility of running into legal trouble later once you’re ready to resign.

Frequently Asked Questions

Which clients can you take with you under the Broker Protocol?

The answer depends largely on how you acquired your clients at your former firm. Clients you onboard are typically covered by the Protocol and may not be contested by the firm. However, if you managed clients as part of a team within the firm, you may need to determine which ones belong to you when leaving the company.

Can you tell your clients you’re leaving and ask them to follow?

Being compliant with the Broker Protocol means that you can’t attempt to lure clients away from your current firm until you’re employed by a new one. There’s something of a gray area to contend with, as your firm may scrutinize your behavior leading up to your departure to look for signs of possible noncompliance. For instance, the firm may take issue with you announcing your plans to leave on LinkedIn or social media if they believe it’s an indirect attempt to solicit clients before your employment is formally terminated.

What are the five pieces of Broker Protocol?

The five pieces of the Broker Protocol represent the information that you’re allowed to take with you when leaving one member firm for another. They are client names, addresses, email addresses, phone numbers and account titles. Taking any information outside the scope of these five categories is not permitted.

What happens if you’re transitioning to or from a non-protocol firm?

If you’re moving on from a non-protocol firm or moving to one, the Broker Protocol does not apply. In that case, the information you’re allowed to take, if any, can depend on the terms of your employment agreement. If your agreement includes a non-solicitation clause or non-compete clause, that could prevent you from taking any of your current clients’ information with you when changing jobs.

Non-solicitation clauses can specify that you’re not allowed to contact your previous clients for a certain period, which may be several months or several years. Non-compete clauses can hinder your ability to gain employment with other advisory firms if they’re considered to be a competitor of your previous one.

Bottom Line

The Broker Protocol was intended to protect broker-dealers and advisors from unnecessary lawsuits. If you’re subject to the Protocol, it’s important to understand what requirements you’re expected to meet for compliance as you contemplate your next career move.

Tips for Growing Your Advisory Business

  • A creative marketing strategy can make a significant difference in your efforts to attract new clients. Gaining traction can be challenging if you’re starting over with a new firm or launching a business of your own. Partnering with an advisor marketing platformcan help you increase visibility and start making valuable connections. Sign up for a free demo to explore how SmartAsset’s Advisor Marketing Platform can help you expand your practice’s marketing operation. Get started today.
  • Compliance is something to take seriously as an advisor. If you’re launching an RIA firmor looking to grow one, compliance software can be a smart investment. Having an all-in-one software solution makes it easier to cover all the regulatory bases and stay up to date on changing guidelines.

Article by Rebecca Lake, SmartAsset