How the Broker Protocol turmoil will ‘significantly change’ HighTower

MIAMI BEACH, Fla. - Uncertainty surrounding the Broker Protocol will "significantly change" the way HighTower Advisors operates its business, said HighTower CEO Elliot Weissbluth speaking at DeVoe & Co.'s inaugural M&A conference.

Fresh off a $100 million recapitalization from private equity firm Thomas H. Lee Partners, HighTower will focus on acquiring RIA firms for future growth, and is also considering adding tax services to its menu of client offerings, Weissbluth said.

HighTower's initial business model was to recruit high-producing wirehouse brokers. For years, the Broker Protocol, which permits advisors to take basic client contact information with them when they switch firms, provided "legal air-cover to execute our business plan," Weissbluth said while speaking at the MarketCounsel Summit, which preceded DeVoe's M&A event. "It was a tremendous gift for us."

But the decision of Morgan Stanley and UBS to pull out of the Broker Protocol has created "friction and tension," Weissbluth said at the M&A conference. "We're going to let other businesses lead the way" when it comes to recruiting breakaway brokers, he added.

'A LOT OF TESTING' AHEAD
The controversy surrounding the protocol "has created a lot of turbulence," Weissbluth said in an interview with Financial Planning. "There will be a lot of testing of laws, especially a wide variety of state and local laws that will complicate the departure of wirehouse brokers."

HighTower's decision to pivot towards RIAs for growth is likely to be replicated, said David DeVoe, managing partner of DeVoe & Co., the San Francisco-based M&A consulting firm.

"There is likely to be a surge of wirehouse brokers leaving in the next few months," DeVoe said. "But if other firms exit the protocol, it will have a profound dampening effect on breakaways. Advisors that have had a multi-track inorganic strategy will shift more of their resources to the RIA space."

The Broker Protocol is "unraveling, make no mistake about it,” MarketCounsel CEO Brian Hamburger said at the MarketCounsel Summit. Even though Merrill Lynch announced it was staying in the protocol, Hamburger and Sharron Ash, MarketCounsel's chief litigation counsel, were not convinced.
"We will continue to see firms exiting, including Merrill Lynch," Hamburger predicted. Large brokerage firms are increasingly focused on retention and no longer view the protocol as a recruiting tool, Ash explained in an interview. "The reasoning for the other firms dropping out is the same for Merrill," she said.

TAXING DECISION
Fallout over the Broker Protocol continues to reverberate.

At HighTower, for example, additional client offerings could also contribute to future growth for HighTower, Weissbluth said.

"We're looking seriously at adding tax services as part of a manifold offering," he said at the M&A conference. "We haven't made a decision yet, but think that it's really valuable."

HighTower is examining how to "broaden its service capabilities" to grow the firm in the wake of its recapitalization, Weissbluth told Financial Planning. "Adding tax-related services is high on the list," he said.