Merrill Tweaks Pay Policy So Brokers Can Collect on Family IRAs
(Updates to indicate that Morgan Stanley is not modifying its plan to withhold payment on family retirement accounts.)
Merrill Lynch Wealth Management and Wells Fargo Advisors have tweaked compensation policies that deprived brokers of pay for trades in their own and their families’ individual retirement accounts.
Merrill late Friday announced a workaround to the unpopular Family IRA policy that was to have gone into effect for its almost 15,000 brokers next month as part of its 2018 compensation plan. Wells implemented a similar remedy in October to a policy that was in place for the 2017 compensation year, a spokeswoman confirmed.
Both firms are now permitting brokers to be paid, and to accumulate revenue grid credit, for their own retirement accounts and for those of close family members if they pay themselves from withdrawals from cash management or other non-retirement accounts.
Merrill presented the change as a measure of its responsiveness to its brokerage force.
“Since announcing the Family IRA policy several weeks ago, we’ve been closely engaged with our ACMs (advisory councils to management) and advisors across the firm on this topic,” Merrill executives wrote in a memo reviewed by AdvisorHub.
To give brokers time to set up nonretirement accounts for family members (“the advisor, spouse, siblings, lineal ancestors and lineal descendants”), Merrill said the broad ban of family IRA compensation will not become effective until the second quarter of 2018. (It was to have taken effect at the start of the year.)
Merrill also told brokers that family members can have joint accounts from which IRA fees can be debited.
The retirement account restrictions, which UBS Wealth Management Americas and Morgan Stanley also have put in place this year, created consternation among brokers who have significant funds in the accounts and receive commissions for ongoing transactions in them.
Some Wells brokers told AdvisorHub that they have moved their IRA accounts to outside discount brokers and robo-advisors to enjoy transaction and account-maintenance fees that are lower than what they were paying at Wells.
Brokerage firms have imposed the prohibitions on pay for family retirement accounts to comply with an Internal Revenue Service “prohibited transaction” rule, they have told advisors. The rule had long been in effect but was rarely enforced by Treasury or the Department of Labor, the overseer of retirement accounts.
“The DOL realized that if they did enforce it, every broker would be in the hot seat because the first account that any broker opens is for their mother,” said Ed Slott, an accountant in Long Island who specializes in individual retirement accounts. “Firms tell them to do that.”
The toughened pay standards on family IRAs paralleled imposition of the DOL fiduciary rule that went into partial effect in June. It requires brokers to collect “reasonable” compensation.
Merrill has “been able to identify circumstances where advisors could be paid on some family IRAs, consistent with our regulatory obligations,” a spokeswoman said.
The firm also said that deducting fees from outside an IRA rather than from the account itself can help preserve retirement assets and is familiar to customers. “[M]any clients already use this arrangement to maximize the tax deferral benefits of their IRAs,” Merrill officials wrote in their Friday memo.
Morgan Stanley is not changing its policy on eliminating compensation for personal and family retirement accounts, a spokeswoman said. The policy is effective at the start of January.
Spokespeople at UBS Wealth Americas did not respond to a request for comment on whether the firm will modify its policy on family IRAs.
“The workaround is a little cumbersome but better than not getting paid at all,” said one Merrill broker who has spent his career at the firm.