The financial world is abuzz about the fact that many major players in the broker-dealer world are leaving the Protocol for Broker Recruiting. There was a time where broker-dealers regularly litigated over non-solicit and non-competition agreements with their former registered representatives.

There was a sea change event in 2004 when three major players created and joined this Protocol for Broker Recruiting, setting the ground rules for the transition in employment of registered representatives. At one point, there were over 1,500 signatories to the Protocol. No longer would the firm spend a small fortune in litigation to enforce these restrictive covenants.

There has been relatively peace over the last two decades. Broker-dealers understood that registered representatives may pick up and leave and follow certain ground rules. Treat those employees fairly, and they are more likely to stay. If those employees find greener pastures, they will leave in an orderly fashion.

Recently, there been a number of significant departures from the Protocol. Morgan Stanley in 2017 announced it would no longer participate. This caused a return to the days of the Friday afternoon resignation, Monday morning temporary restraining order, followed by a FINRA arbitration. Somewhere along the way, there will be a mediation.

Many have considered the financial industry to be cannibalistic. Every broker-dealer wants the large account. But, our country has an enormous wealth disparity. The financial planner wants the account worth $1 million or more, and anything less is treated as a loss leader.

In 2018, the richest 10% held 70% of total household wealth, up from 60% in 1989. In 2014, the most recent year data is available, only 26 counties (of 84) in Minnesota had more than 20 millionaires, defined as having income of $1 million or more as reported on tax forms. There are only 5,365 millionaires statewide, mostly in the Twin Cities. And nationally, according to the Federal Reserve’s Survey of Consumer Finances, the median net worth of a head of household age 45-54 is $124,200; the median net worth for age 55-64 is $187,300.  The broker dealers are obviously fighting for a limited number of accounts.

With relatively few millionaires in our state, financial advisors and broker dealers are able to grow only through recruiting existing accounts from other firms. Those broker dealers will want to protect those accounts with a non-competition agreement; thus we are now seeing many firms leave the Broker Protocol and, in turn, we see more litigation. That is the Big News in the financial industry.

I am seeing more employment disputes involving these restrictive covenants in the financial industry. The litigation costs are enormous, regularly exceeding six figures. The arbitration awards are usually unpredictable. Mediation is now as important as ever. The parties are well-served to participate in mediation and avoid the uncertainty of arbitration and the extraordinary costs of litigation.