By Matt Sonnen
The recent news of Morgan Stanley’s and UBS’ exit from the Broker Protocol caused quite a stir in both the wirehouse and the registered investment advisory industries. (You can see our take on the news here.) Many industry leaders believe that other wirehouses will follow suit and exit the protocol themselves. Some are questioning if those departures will quell the movement of advisors from the wirehouses to independence. While this news has definitely made advisors re-evaluate their commitment to transitioning their business, we believe non-protocol transitions can be extremely successful, as long as advisors take a few operational issues into account as they plan their departure.
Keep in mind, we are not attorneys, and this post does not contain legal advice of any kind. As operational consultants that advise financial advisors on the nuances of starting an RIA, we always suggest advisors consult with legal counsel before embarking on a breakaway transition.
Whether you are planning an exit under the Broker Protocol or not, all aspects of your move prior to your resignation from your wirehouse firm are the same—you cannot notify clients of your intention to move, nor can you solicit employees of the firm to join you. Protocol or no protocol, you are still bound by your duty to your employer not to compete. Once you have resigned from your employer, however, a protocol vs. non-protocol transition will differ substantially.
Under a protocol transition, you are allowed to take basic client contact information with you when you depart. You can take client names, addresses, phone numbers, email addresses, and account types (consult with an attorney to learn how and when you can properly and legally take this information). You are then allowed to contact clients by phone and/or email to notify them of your departure and let them know about your new RIA. You can also provide that basic contact information to the custodian of your choice to pre-populate the account opening and transfer forms, which you will send to your clients in relatively short order to get their approval and signatures to move their assets to your new firm. Protocol transitions, on average, take about three months to transition the majority of your client assets, as you track down clients to explain the virtues of independence, get the proper signatures and other relevant information on the appropriate documents, and get the assets transferred from your old firm to your new one.
With a non-protocol transition, you cannot leave your wirehouse firm with any client contact information, nor are you allowed to actively reach out to clients to notify them of your move. As clients reach out to you via cellphone or social media, however, they can express their desire to continue working with you as their advisor, and you can then send them a data request that will provide the custodian of your choice with the proper information for filling out the necessary forms to move their assets. Once completed by the custodian, you can then forward the documents to clients for signature. While a protocol transition will take approximately three months, we feel advisors should anticipate a conservative six-month transition time for non-protocol moves, given the added time it will take for clients to reach out and provide the necessary information to transfer their assets.
Many advisors are able to “bootstrap” their business for three months, as they pay their employees, office rent, and technology expenses out of pocket until the client assets have transferred and they can process their first billing cycle. With a six-month window, however, financing may be more critical. There are institutions, such as Live Oak Bank, that lend money to independent advisors.
Once your financing is in place, budgeting expenses for the next several months will be more crucial than ever. You may want to cut back on some office buildout expenses until after your clients have transitioned. Maybe you don’t need the fancy artwork on day one, or the most state-of-the-art video conferencing system on the market. Non-protocol transitions are far from impossible, but do require a tighter planning schedule and budgetary process.
Matt Sonnen is the founder and CEO of PFI Advisors, an operational consulting service for breakaway advisors. He is the former chief operating officer and chief compliance officer of Luminous Capital.
