Financial advisors are people, just as their clients are. And sometimes, this means that one wants to move somewhere else, which can get quite messy. The world of money and business is confusing and complex, particularly when people’s emotions are added to it. And according to Jonah Engler, things are likely to get a lot messier soon.
Jonah Engler on the Role of the Financial Advisor
A financial advisor is a kind of mentor or guide, helping investors find good brokers and investments according to their own need. They may want to buy or sell stocks and bonds, get out of debt, or anything else. Typically, advisors have clients for life, because those clients trust them so much. What this means is that, if the advisor moves to a different company, the clients come with them.
This is known as broker recruitment and it is a practice that has been followed for many years. However, a number of investigations and allegations have now started, whereby wealth management firms are threatening to take legal action against clients that move with their advisor. According to Jonah Engler, this is because of the client fees, which amount to billions of dollars.
In 2004, the so-called broker protocol was created by UBS, Smith Barney, Morgan Stanley, and Merrill Lynch. Some 1,700 firms globally endorse this protocol. However, Morgan Stanley pulled out in 2017, and UBS quickly followed suit, as did Citibank. That amounts to over 20,000 individual advisors, which demonstrates just how big the impact could be.
FINRA is paying close attention to what is happening as a result. Some are suggesting that clients no longer receive information if their advisor leaves, and particularly that they don’t find out which firm they have moved to. This is a terrible consequence because clients have always come first in the financial industry and that seems to have changed now.
While it is perhaps true that firms are able to take out legal action if their advisor leaves, what they are actually doing in that is stopping their clients from having freedom of choice. This also happened in the 1980s, when advisors would actually take injunctions out because they wanted their clients to stay. Things changed in 2000, when the dot-com crashed, leading to significant regulatory scrutiny. This is also why the broker protocol was created.
The big four brokers who started the protocol did not do it because they expected many other firms to sign up. They thought it would continue to be just for the biggest firms. But they were pleasantly surprised to find so many others joined up. Now, however, it seems the wind of change is blowing once again and it isn’t entirely clear why this is happening. Naturally, the billions of dollars in client fees are a big dangling carrot, but that carrot has been there for a very long time. Jonah Engler is monitoring the situation to ensure his clients continue to have the best deal.
