Merrill Lynch Curbs New Investments in BlackRock-managed SMAs
Merrill Lynch Wealth Management is prohibiting brokers from opening separately managed commission accounts from BlackRock as part of the money manager’s “Private Investors” program for wealthy Merrill customers.
The program that Merrill has offered for 36 years holds $45 billion of customer assets in 15,000 Black Rock-managed accounts with equity, fixed-income and multi-asset investment strategies.
The shift appears to serve the dual purpose of meeting the more rigorous product selection requirements of the Securities and Exchange Commission’s Regulation Best Interest, which took effect on June 30, and of prodding brokers to move clients to fee-based advisory accounts that most firms prefer.
“This decision aligns to our focus on serving clients in a fiduciary capacity,” a Merrill spokeswoman said, referring to the client-care standard that applies to advisory accounts.
Merrill is not alone in streamlining its product line to conform with the new Reg BI standard, but the change appears to be irritating some advisors who promote separately managed accounts (SMAs) as more customized—and sometimes more costly—investment solutions than model portfolios designed by firm strategists.
“Guys have been using Blackrock PI for many years, and to not be able to open new relationships where you had more flexibility on pricing sucks,” said a New York broker who has worked at Merrill for more than 25 years. “My best guess is that they are doing this to get more people to use the chief investment office portfolios. They’re cheaper, but they’re cookie cutter.”
A person at Merrill familiar with the changes said brokers retain pricing flexibility on the advisory platform and can continue to direct money into third-party portfolios. The firm also is adding more options to the investment advisory platform.
“Our Investment Advisory Program offers investment strategies from a wide range of managers, including comparable SMA strategies for the majority of BlackRock PI clients who wish for these assets to remain in BlackRock investment strategies,” the spokeswoman said.
Reg BI requires firms and brokers to disclose conflicts of interest and document why they have made product recommendations, but it applies only to brokers offering commission accounts.
When acting as investment advisers offering fee-based accounts, they are subject to the fiduciary standard that requires them to act solely in a client’s best interest. If brokers were subject to a fiduciary standard, they would be prohibited from selling a product that might pay them more than a similar one with a lower payout that may be marginally less suitable.
BlackRock, which bought Merrill’s asset management business in 2006, promotes the Private Investor SMAs as a “personal portfolio management” service available “exclusively through your Merrill Lynch Financial Advisor.” But the money manager acknowledges that the new regulation constrains commission-account sales.
“Following the SEC’s Regulation Best Interest, we are working closely with Merrill Lynch to continue to provide customized investment solutions tailored to clients’ long-term goals through the firm’s advisory platforms,” a BlackRock spokeswoman said.
To avoid conflict-of-interests that must be disclosed or eliminated under Reg BI when investment recommendations are made to retail investors, firms have made other significant changes.
UBS Wealth Management USA now waives separately managed account fees on portfolios it manages in-house as well as on several from outside managers. It also has introduced a single-share class category for some fund sales in brokerage accounts to avoid having to justify share classes that pay brokers ongoing trail commissions, known as 12b-1 fees.
Wells Fargo Advisors has cut about 3% of the funds on its platform for Reg BI implementation, a spokeswoman said, and Merrill has halved to five years the length of time brokers can collect the trailing commissions.
“As broker-dealers continue to evaluate how to serve clients in robust fiduciary relationships, I would expect these types of product and relationship rationalizations to continue through 2020,” said Greg O’Gara, a senior analyst at Aite Group’s wealth management practice.
Compliance consultants said accounts outsourced to third-party managers add significant complexity in meeting Reg BI restrictions.
“When an advisor or even a brokerage firm is offering multiple programs, the challenge becomes in delivering the various documentation and understanding the conflicts that may arise in each of the different scenarios,” said Iain Duke-Richardet, compliance strategy principal at Hearsay. “Streamlining their product offerings would make sense to avoid conflicts from arising and improve the degree of transparency.”