The Department of Labor’s (DOL) new fiduciary rule is having a far-reaching impact on the retirement planning industry. Many firms and advisors who worked with retirement plans and accounts using the previous suitability standard are now scrambling to restructure their business models in order to become compliant with the new regulations.
In October, 2016, Merrill Lynch took a substantial step towards accomplishing this goal by announcing that it will remove commission-based transactions from all of its retirement accounts. They will instead begin charging their clients a fee based upon a percentage of assets under management. This move marks the single biggest change made by a major financial services provider to adapt to the new rules to date. (For more, see: The Fiduciary Rule's Impact: How It's Already Being Felt.)
A possible 60-day delay in implementing the rule however prompted the firm to consider scaling back its pledge and continue offering commission accounts to select clients. Merrill head Andy Sieg told brokers in a March, 2017, memo that the firm identified "limited situations" in which a fee-based advisory structure would not be in the client's best interest, according to The Wall Street Journal. Such scenarios include accounts with private equity stakes or concentrated stock positions that are not frequently traded.
According to the memo, Merrill Lynch may create an alternative product for these clients, but did not specify which investment vehicles would be available nor the costs involved.
Impact of Rule
The fiduciary rule is designed to require brokers and advisors to unconditionally put their clients’ best interests ahead of their own in all of their business dealings. Morningstar has estimated that the new rule will affect about $3 trillion of client assets. Because brokers who work on commission can be enticed to use products and services that charge more than other alternatives that may be a better fit for the client, the brokerage arm of Bank of America has told its brokers that they will no longer charge their clients commissions as of April 10 of next year, when the new rules officially go into effect. By charging a flat fee for assets under management, Merrill Lynch brokers will be able to allocate client assets more objectively.
“This requires that clients engage with the firm fully. If the client isn’t willing to do that, they will need to look for different options,” Alois Pirker, a research director at Boston consulting firm Aite Group told The Wall Street Journal.
Based on its original decision, clients who have retirement accounts at Merrill Lynch that are commission-based will be able to keep their accounts as they are after April 10 of next year, but they will not be able to receive any further advice or services on those accounts or make any significant changes in them unless they convert to the fee-based structure. Merrill is aware that the shift in their compensation model will require some clients to pay more than they have been. They are allowing their brokers to provide clients who are affected with fee discounts in order to accommodate this. (For more, see: Merrill Lynch to Enter Robo-Advisor Arena.)
Retirement clients who want to continue to pay commissions will also have the option to move their accounts to Merrill Edge, Merrill’s online brokerage service. This service also offers a cheaper fee-based alternative and will soon offer a robo-advisor service called Merrill Edge Guided Investing. But the majority of Merrill’s $2 trillion in assets under management will be unaffected by the rule, as less than 10% are housed in retirement accounts.
The path that Merrill is taking may serve as an example for other major brokerage firms that may be contemplating a similar move. Merrill has eschewed taking advantage of the Best Interest Contract Exemption (BICE) provisions in the new rule that allow advisors to receive commissions for retirement plan transactions as long as certain requirements are met and additional paperwork is completed. Insiders say that it has done this because the additional paperwork is burdensome and there is still a higher potential for broker liability. However, Merrill will use this provision when it comes to advising clients on potential retirement plan rollovers from commission-based accounts to a fee-based account.
The Bottom Line
Despite initial speculation that other financial services firms may copy Merrill’s bold move to replace all of its commission-based retirement accounts to a fee-based model, most have opted not to do so, including fellow wirehouses Morgan Stanley and Wells Fargo. However, clients may end up paying more overall under this new arrangement, as Morningstar has estimated that fee-based revenue may be as much as 60% more than commission-based revenues. Brokers may end up earning this higher level of pay by learning more about their clients' investment objectives, risk tolerance and time horizons. (For more, see: The Coming Fiduciary Rule: Advisor and Client Impact.)