Commissions? Don’t Risk It!
Editor’s Note: Our editorial on the competitive implications of Merrill Lynch’s unilateral decision to end commissions in retirement accounts created a torrent of response, some shared in the story’s comment section, and some in longer missives. Morgan Stanley encouraged us to share this memo to brokers asserting customers’ “overwhelming positive reaction” to the firm’s alleged pro-choice decision on the issue.
Below we present an unsolicited defense of Merrill’s strategy from a headhunter and longtime field manager who assertively warns that the legal consequences of sticking with commissions, as allowed under the Department of Labor’s Best Interest Contract Exemption (BICE) can be devastating. We welcome your opinions.
To BICE or Not to Bice? With deep apologies to William Shakespeare, this is the most pressing question of the day in light of the now notorious FAQs the DOL released two weeks ago.
Within minutes of their release, Morgan Stanley had an all-hands-on-deck call with field managers to rescind deals and restructure them to be compliant with the DOL’s guidance. Within another few hours, all firms had followed suit.
The back-end bonus portion is the item at issue. If as a firm you offer a BICE, you must be scrupulous to ensure there is no form of incentive compensation that might create an additional possibility of “fiduciary conflict,” so you should not offer any “back-end” structures.
The same issue gave rise to the advice that standard payout grids must slope gently with many steps and retroactivity be very limited. Are you noting a trend?
I have been, and remain, of the position that the BICE provision is nothing but liability and a contributor to fee compression. It does not simply make the top line challenging, it severely restricts net compensation models.
Several firms, for whom I have great respect, are choosing to offer the BICE option for advisors and clients. They are making that offer to stem attrition of advisors and clients alike. It is my position they are just buying time and may be opening a vast Pandora’s Box in the process.
The BICE is a litigation wormhole!
Clients who avail themselves of the BICE, and are unhappy with performance of their retirement account, will have an additional line(s) in their attorney-authored statement of claim. Allegations of the violation of fiduciary duty will be boilerplate. Every claim will include it.
Others will cite the “client lacked the sophistication” to understand the BICE. Many will allege the advisor falsely induced the client to enter into the BICE and point to that “fraudulent inducement” to moot the protections firms claim.
The permutations could be endless given the creative skills of claimants counsel.
Application of the BICE does not negate new account agreements that require most disputes to be resolved in arbitration, but it does open another very scary door permitting class-action litigation in court.
Imagine one upset client spawning into a class of 10 or 20 or 50 clients with whom you executed a BICE. Creative mass tort attorneys know how to track down those clients and to solicit participation. It’s not hard to imagine the script.
“Did you maintain a brokerage account with John Q Broker? Did John advise you on your retirement account? Did he have you sign a Best Interest Client Exception form or letter? Do you think you lost money or overpaid commissions? If so we would like to represent you, with no cost to you, until the matter is resolved in your favor!”
Another concern: If your firm allows you to use the BICE, the firm must be able to demonstrate that your activities with those accounts is closely monitored and documented. In effect, that portion of your book is under “Heightened” or “Special” supervision. It will be a rare month or quarter in which those clients will escape a supervision letter or manager call.
If there is any activity in the account(s), your notes of the who, what, why and when will need to be meticulous, properly recorded and available for compliance review!
Here is a quick list of where I fear use of the BICE will lead. It will:
- Accelerate decline of your top-line revenue;
- Diminish potential recruiting compensation;
- Bring your payout into question;
- Enhance your vulnerability to questionable client complaints;
- Expose you to the risk of being a respondent in a class-action lawsuit;
- subject you to even more cumbersome compliance supervision
Why would you do it?
The most frequent response is client retention. My view is that is not a reality. Clients don’t stay with you for having mastered the status quo.
If you respond that buy-and-hold clients do better with transactional accounts, I would argue that if that is the sole portion of the client relationship, it’s not an account worth your time.
And if the relationship is more complex than a low/no compensation retirement account why not explore more attractive, DOL-compliant alternatives, including custodial vehicles for retirement assets with advisory wrap management fees that can dip below 20 basis points.
To keep an otherwise productive and profitable client relationship, most firms will approve such a pricing structure.
In short, embrace the reality that the DOL rule is changing the business, and you must change, too.
Even if your firm offers the BICE option I urge you to pass. There is no obvious reward and the price of keeping one foot in the past could prove very high.
Philip Waxelbaum is the founder of Masada Consulting and works in consultation with Willis Consulting, a financial advisor recruiting firm in Los Angeles that has worked with Merrill Lynch, among other firms. He was previously a managing director at JP Morgan in Century City, Calif., a Managing Director and Head of Private Client Group at Deutsche Bank, a complex manager at UBS Wealth Management Americas, a complex manager at Smith Barney and National Sales Manger of Prudential Securities. He began his brokerage career as an advisor at Prudential Securities in New York City.