Commonwealth Defends Ban on Commission-based Retirement Products
Commonwealth Financial Network’s decision to prohibit its 1,650 brokers and advisors from selling commission-based products in retirement accounts to meet the Department of Labor’s new fiduciary rule is reverberating through the independent brokerage community.
Just as Merrill Lynch jolted the big-brokerage world when it similarly told its brokers they will be restricted to fee-based retirement accounts when the rule takes effect on April 10, 2017, Commonwealth’s decision raises questions about whether it can compete with firms with less restrictive policies or has grabbed a first-movers’ advantage with policies that rivals will be forced to emulate in whole or in part.
Both companies made their decisions to comply with the Department of Labor’s imminent conflict-of-interest rule that will prohibit brokers from selling investment products in retirement accounts based on their own, rather than their customers’, best interests.
The rule permits commission-based sales if brokers issue customers so-called best-interest contracts, an exemption that Merrill and Commonwealth believe will be difficult to implement and monitor and subject them to huge litigation risk.
“We understand that this is going to interrupt business as usual, and you never want to inconvenience people,” said John Rooney, Commonwealth’s managing principal discussing the need for brokers to repaper commission-based individual retirement and qualified-plan accounts. “But to try and comply with the DOL (best interest exemption) is going to be an enormous undertaking and you would still be at risk. We felt it would be a hopeless endeavor.”
Commonwealth, based jointly in Boston and San Diego, operates through brokers who are independent contractors rather than employees. Such brokers keep a much higher percentage of commissions and fees than those at conventional firms but are particularly vulnerable to the DOL rule because independent firms sell a much higher percentage of private real estate investment trusts, limited partnerships, variable annuities other high-commission products than do conventional brokerage firms.
Commonwealth officials like to position the firm as somewhat unique, however, saying more than 70% of its total revenue comes from fees and less than 10% is derived from commissions on retirement accounts.
“It’s not nearly as big an issue here as at other places,” Rooney said when asked if he thought competitors will follow Commonwealth. Rivals such as LPL Financial that have big businesses running brokerage operations for banks will find fee-only policies particularly difficult because their “glorified tellers” rarely have the qualifications or experience to sell fee-based advisory accounts, he said.
LPL, the biggest independent broker-dealer with more than 14,000 brokers, did not respond to a request for comment.
However, hours after Commonwealth announced its policy to its workforce on Monday night, LPL Chairman and CEO Mark Casady wrote on his Twitter feed: “We are supporting all forms of advice under the new standards to allow #investor choice, lower cost and #advisor independence.”
The brokerage firm has previously announced tweaks to its compensation and product offerings in preparation for the DOL rule.
In a prepared statement, Commonwealth acknowledged the investor-choice argument. “Although we have taken this step in relation to retirement accounts, we continue to believe that a commission-based approach remains an attractive and appropriate option for many investors—and thus we will continue supporting that option for non-retirement accounts,” it said.
Commonwealth, to be sure, had “extensive discussions” with many of its brokers in advance of its announcement because “you’d be crazy to announce this in vacuum,” Rooney said.
The biggest risk for Commonwealth is in losing brokers who sell a lot of “alternative” investments, such as privately traded REITs, from sponsors that do not offer fee-based compensation.
“We’re willing to take the chance,” Rooney said. “I’d be shocked if we saw a material number of them exit.”
-Mason Braswell contributed reporting.