EXCLUSIVE: Merrill to End Commission-Based Retirement Business on Retail Accounts
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Merrill Lynch plans to tell its more than 14,000 brokers today that they cannot receive commissions for advice on retirement accounts, becoming the first big firm to fundamentally shift its sales philosophy in the wake of the Department of Labor’s new fiduciary rule.
The decision by the Bank of America-owned broker-dealer has broad implications that will likely affect broker compensation, hiring policies, selling contracts between mutual fund companies and brokerage firms and the growth of no-frills investment platforms such as the bank’s own Merrill Edge program for “self-directed” investors.
Merrill’s decision means brokers who generate business by persuading people to roll over 401(k) company retirement plan assets into individual brokerage accounts and who charge commissions for individual retirement accounts will have to rethink their strategies and, more practically, “repaper” current clients by shifting them to fee-based accounts, or, by sending them to Merrill Edge.
To ease the transition, Merrill will allow advisors to discount the fee charged to customers who remain with the firm but switch retirement accounts to the fee-based investment advisory platform known internally as Merrill One, said a person familiar with the plan.
When Merrill One was introduced several years ago, many brokers objected to the higher fees they were being forced to impose on long-term customers as a result of a tightened discount-sharing policy. The source would not comment on how long the fee flexibility will be in effect or the level of discounting that will be permitted in the transition program.
Merrill’s prohibition on commission-based retirement accounts is scheduled to begin on April 10, when the DOL rule begins to take effect. [Editor’s note: The new implementation date under the Trump administration is June 9.]
Customers can maintain existing commission-based individual retirement accounts, but brokers will not be able to sell or accept orders for additional brokerage account investments, meaning they will not be compensated for the accounts.
The person familiar with the plan would not comment on whether brokers who receive 12b-1 fees for funds in existing individual retirement accounts will be required to transfer the accounts to Edge, as some sources told AdvisorHub.
Merrill also will require all brokers to obtain two new internal accreditations attesting to their understanding of their fiduciary responsibilities, with training beginning later this month, people familiar with the plans said.
BEST INTEREST CONTRACT
The DOL rule requires advisors to put their customers’ best interests ahead of their own when making retirement investment recommendations, a fiduciary standard that supersedes the less rigorous “suitability” standard that currently governs brokers’ sales practices. It effectively prohibits commissions because they can sway brokers to recommend products with bigger payouts to them than do accounts that charge a level and “reasonable” fee regardless of an account’s investments.
The rule permits some commission sales if brokers contractually agree to put a client’s best interests ahead of their own. The so-called best-interest contract exemption [BICE] also permits investors to participate in class-action lawsuits claiming violations of the customer-care standard, overriding most firms’ requirement that customers bring disputes to private arbitration forums.
Merrill Lynch and Bank of America apparently decided that the extensive record-keeping costs and potential litigation costs of using the BICE would be too high and too risky, said several observers when told of the decision. Because the fiduciary rule applies only to retirement accounts, it also is expected to create a difficult-to-monitor two-tier system between retirement and standard accounts that brokers and their supervisors could exploit or mistakenly abuse.
“The BIC, for obvious reasons, would be the preferred choice but it has onerous compliance requirements and the threat of class-action against big deep pockets has to be top of the mind for big firms,” said Duane Thompson, a senior policy analyst at consulting firm fi360.
Merrill plans to tell its brokers that the decision was not motivated by litigation or compliance-cost concerns but by its conviction that its Merrill One “guided investment” program will be the “go-forward platform for clients who want IRA accounts,” the person familiar with the decision said. “It sets us up very well to perform in a best-interest environment, since we have knowledge of clients’ goals,” the person said.
For customers who prefer low-fee advice, Bank of America is expanding Merrill Edge.
It confirmed this week that it has enhanced Edge with a “robo” automated investment program that charges 0.45% of assets. That contrasts with the typical advisory fee of 1% to 2% of assets that most brokers in the industry charge.
Merrill’s decision may prompt some brokers to jump to rival firms that will permit use of the BIC exemption, if such firms can be found, said some recruiters who spoke on condition of anonymity for fear of antagonizing Merrill.
Officials at several rival firms said they have not yet made final fiduciary rule policy decisions pending negotiations with investment companies on revenue-sharing and other sales arrangements that will be affected by the DOL’s rule.
Edward Jones in August said it would allow its brokers to use the BICE in a transaction-based IRA with a limited range of investment products.
Paul Reilly, chief executive of Raymond James Financial, said in April that his firm might benefit by luring brokers from firms that limit retirement account sales flexibility, though he cautioned that Raymond James will scrutinize each prospective hire’s book to determine whether it is too IRA-centric.
Merrill’s influence on the brokerage industry remains large, and corollary businesses are expected to be affected by its retirement-account commission ban.
Fund companies, for example, are expected to renegotiate contracts with firms like Merrill that distribute their products to reflect the new prohibition on structures such as 12b-1 fees that pay brokers over the lifetime of customers’ fund holdings.
“Mutual funds, exchange-traded funds, and other regulated funds are—and will remain—vital investment choices for millions of Americans saving for retirement and other financial goals,” David Blass, general counsel of the Investment Company Institute, a trade group, said in a prepared statement when asked about the effect of the DOL rule on fund sales and distribution agreements. “Each fund complex is working very hard to determine how best to serve its distributors and the retirement market under the demands of the new fiduciary rule.”