The Protocol allowed Financial Advisors to move from one firm to another firm with no legal consequences as long as the Advisor followed the Protocol on what client information they took with them and the Advisor followed the rules of contacting their clients. The Protocol was designed to lower the legal fees that the firms were incurring with departing Advisors and also smoothed the way for the Advisors that they were recruiting for themselves. The recruiting deals got bigger and the firms accumulated generally speaking around $5 billion in Broker Loan Books.
This money had an affect on a financial institution in that these loans tied up money that could be used for the new capital requirements that were imposed after the Financial Crisis. This capital requirement is rarely discussed and yet I believe it was a factor in financial firms withdrawing from the Protocol. Capital is one reason but in my mind it is not the only reason. It is difficult to give a FA a 9 year deal in an era of immense change where we are facing fee compression, new competitors and our basic value proposition is being questioned. One can easliy build a scenario where recruiting FAs where the average age is like 58 years old in a market of declining fees and no organic growth will not end well. If a FA's revenues decline signficantly during the 9 years it becomes a write off for the firms and in a capital intensive environment this is not a recipe for success. Additionally the firms have introduced retirement deals for FAs that are actually funded from the revenue of the books of the retiring FAs. These retirement deals have reduced the pressure on retiring FAs to move firms to fund their retirement. All these factors together make a strong case to stop or at least slow down recruiting.
But, the infamous but, firms not recruiting lays bare a signficant problem. The industrys' inability to train new FAs and most importantly no organic growth. Our inability to train, and our success rate is abysmal, has led the firms to deemphasize headcount importance. The new focus is on assets per FA, managed assets for the firm and average revenue per FA for the firm. All three of these new focuses are directly affected by the bull market. Since none of the firms have any organic growth, nothing of consequence anyway for the past 25 years, the bull market directly effected the three areas of focus for the firms. Markets go up, assets per FA go up, managed assets go up and the average production of a FA go up. Cerulli recently had a report pointing out that managed money was a two edge sword. Revenues rose when the market went up but the flip side was that FAs were no longer pro-active in getting net new assets as the bull market raised their income with little to no extra work. Life is good. Of course what happens when we have a correction? And yes we will have a correction, someday.
I don't think anyone, including Financial Advisors, believes that recruiting is a good business model but it did address the two weaknesses of the Retail Financial Industry, our inability to train new Financial Advisors and to inability to grow organically. As one Complex Director always said only good things happen when you recruit. Your headcount goes up, your assets go up and your revenue goes up while the firm pays for it all. The Branch Manager's job was to take large quantities of money and entice Financial Advisors to join their offices.
Financial Advisors blather on about joining a firm that cares about their clients and the new found freedom to do business the right way but from personl experience, it was always about the money.
So the post Protocol era raises several questions in my mind. First, if you decide to move can you wihout incurring a year long restraining order not to contact your clients? I say yes and technology is the answer. There are three things a FA must plan out to successfully move with no legal ramifications. Again, first, make sure all your clients are linked to your LinkedIn Page. The firms want you to do this and if you can link your clients then when you leave and you change your LinkedIn page to your new position with all your contact information. Everyone is immediately notified that you left and where you are. They can reach out to you or you can reach out to your clients through LinkedIn.
Second, make sure all your clients have online access and then write down step by step instructions you can give to your clients on how to a PDF their monthly statement and email it to you.
Third, instead of PDFing the statements you could use the new aggregation tools to access all the client information you need to move their assets.
Technology has made it simple and legal and all we have to do is a little pre-work that the firms are encouraging us to do.
Remember in a post Protocol era it is not a financial industry legal requirement about client information but rather that the firms are held responsible, legally and financially, for protecting client information. This concept came from the original Patriot Act and has been reinforce through many different laws and regulations over the past 17 years. Given the FaceBook situation I don't believe that personal information will be allowed to be taken without ramifications. So where we do want firms in all industries to protect our personal information we can not expect that any industry will allow an at will employee to leave and go to another firm with the client's personal information. Legally it is indefensible. Luckily for us clients can choose to become part of our network and our job is to make sure we are networked.
Final thoughts. It is all about the money. Yes it was and at this moment it still is. The deals are down unless your big enough to get an offer from JPM but even a middling producer can clear a 250% deal. But in my mind this all about to change and change dramatically. Where today you will base your decision on money it may come back to haunt you in rather short order.
In the next 2 to 3 years money will no longer be the determining factor for Advisors to move. Advisors will only move based upon the technological capablities of their firm and their technology spend. I believe that deals will only be a "cost of moving". Advisors will recognize that they will not be competitive at a firm with old technology and the firm has a low technology spend. Specifically speaking I am referring to the introduction of AI into the the Advisor's business model. Your firm will either be the Amazon/Apple/Google of the financial industry or you will not be there and will fight/beg/plead to be at firms that have the new capabilities.
Looking at the landscape today the two leaders in the clubhouse are Merrill Lynch and Morgan Stanley. Both firms lead in technology spend and both firms have recently introduced basic AI capabilities. These capabilities are going to grow exponentially as once the tracks are laid, AI capabilities, adding new cars, new value added services, will move at light speed. Obviously new and old competitors will enter this arena and the future remains opaque but with great clarity we know the direction we are heading. Think about Amazon/Apple/Google. They know more about our clients than we do and we arguably execute the most important function for them, managing their personal money. This must and is changing.
This in my mind will have a negative effect on RIAs where they do not have the technology spend, breath of products and integrated systems to compete in the new world order. RIAs had their day the new day will be owned by technology driven firms and the true Robo-Advisor.
Danny
