JPMorgan to Remove Some Fiduciary Rule Handcuffs, Others May Follow
JP Morgan Chase & Co. is telling its brokers and private bankers to prepare for changes to its retirement account policies and products in preparation for the likely repeal of the Department of Labor’s fiduciary rule next week.
The message, sent in emails from bank executives to advisors at J.P. Morgan Securities, Chase Wealth Management and Chase Private Bank on Wednesday, signals that Wall Street firms are poised to move quickly to reverse restrictions that they imposed to comply with the conflict-of-interest rule that took partial effect last June.
J.P. Morgan and Merrill Lynch, which is owned by Bank of America, took some of the wealth management industry’s strictest steps to ensure compliance with the now-moribund fiduciary rule by prohibiting the use of commission-based retirement accounts. Other firms are indicating they may become more aggressive on sales of commission products such as variable annuities and load mutual funds that appeared to be prohibited under the fiduciary rule.
“In preparation for a repeal, we have been working on changes to the retirement opening and funding processes, as well as to our product offering for retirement accounts,” J.P. Morgan Securities Chief Executive Chris Harvey wrote to the firm’s brokers, noting that the modifications will be effective once repeal of the rule is confirmed. The U.S. Court of Appeals for the Fifth Circuit is expected to issue a mandate for repeal on Monday, May 7, he wrote.
The email did not address specific changes, but told brokers they will have to receive client signatures to open retirement accounts that are not already funded. J.P. Morgan moved clients who wanted to retain commission-based accounts to a self-directed online platform last year, but allowed some brokers recruited from other firms to offer cut-rate fees of as low as five basis points to advisory clients, said one source who spoke on condition of anonymity.
A J.P. Morgan Securities spokeswoman confirmed that the emails were sent, but declined further comment.
The adjustments appear to confirm that the Trump administration has effectively killed the Obama-era Labor Department’s efforts to impose a fiduciary standard that it said would restrain sales practices that reduced annual returns on retirement savings by 1% and cost U.S. investors an estimated $17 billion a year. Wall Street firms complained that the DOL rule was onerous and would limit guidance to less affluent investors or children of their affluent clients who could not afford to pay advisory fees.
The Securities and Exchange Commission last month proposed a set of new “best-interest standard” rules for both retirement and taxable accounts that are less restrictive and do not endorse class-action lawsuits, which was one of Wall Street’s chief concerns about the DOL rule.
JP Morgan appears to have been quickest to tell its sales force that it will release retirement account restrictions, but other firms are indicating that they may make changes as details of the SEC proposals become more clear or may never introduce restrictions they were planning to impose.
“We plan to review the changes we made to comply with the DOL fiduciary rule and will determine whether any adjustments are appropriate,” said Morgan Stanley spokeswoman Christy Jockle.
Dan Arnold, chief executive of LPL Financial, the largest independent broker-dealer, said on Thursday that the company has delayed a new mutual fund “platform” with standardized commissions, load-waived share classes and free exchanges within fund families that aimed to avoid fiduciary-defined conflicts in brokerage accounts.
“That will then allow us to then better understand how to pivot relative to any adjustments in the products, in that product or in that product development…or if we would use the solution,” he told analysts on an earnings conference call. “We’re on pause to try to figure out and get better clarity of the SEC’s rule.”
But LPL expects to see more “product innovation” in variable annuities, an often high-priced product whose sales have been hammered under the DOL fiduciary regime, he said.
Wells Fargo Advisors spokeswoman Shea Leordeanu said the company is “watching the SEC’s developments” but did not address whether it will adjust retirement-account restrictions based on the likely DOL fiduciary repeal.
Sources close to Merrill Lynch said it is not expected to adjust its restrictive policies, citing previous statements from its wealth management executives and Bank of America’s sensitivity to controversy following the billions of dollars of fines it paid as a result of mortgage sales and other practices in the aftermath of the 2008 financial crisis. When the DOL fiduciary rule was finalized in late 2016, Merrill flaunted its commitment to the fiduciary standard and its early-mover restrictions on commission accounts in public advertisements.
“We have long supported a best-interest standard, with consistent and clear rules for all advisors providing personalized investment advice, to all retail clients, in any account,” a Merrill spokeswoman said on Friday. “ We will be studying the details of the SEC rule proposal and providing comments in due course.”
Peter Stack, a spokesman for UBS Wealth Management’s U.S. operations, declined to comment on how the company may respond to repeal of the DOL fiduciary rule.
Commonwealth Financial, which like LPL sells its investment services through independent brokers, also had planned to eradicate commission-based retirement accounts to comply with the fiduciary rule but never imposed the restriction.
“We were pretty confident [the rule] would be struck down at some point and we would back off our policy, unlike those guys that painted themselves into such a corner,” said John Rooney, a managing principal at Commonwealth. “We’re happy with the way this has turned out and happy that client flexibility is in place.”
A spokesman at Edward Jones, which was sued last month for allegedly shuttling its customers into fee-based accounts, did not immediately have a comment on whether it will modify policies in light of the apparent demise of the DOL rule. The firm last summer said it would likely adjust a plan to prohibit sales of mutual funds in commission-based retirement accounts” after signs of opposition to the rule from the Trump administration.
The Department of Labor, via the Justice Department, could still seek a review of the Fifth Circuit court panel’s decision to vacate the fiduciary rule that other courts had upheld, but lawyers said the move is unlikely. A spokesman at the Labor Department said he could not immediately comment.