Merrill Scrutinizes Managed Portfolio Account Fees
Compliance supervisors at Merrill Lynch Wealth Management wrapped up a review this week that may send brokers scurrying to contact advisory account customers or risk having them moved to other parts of Bank of America.
The same portfolios that typically cost customers 1.25% or more of their Investment Advisory Program (IAP) assets when purchased through Merrill financial advisors cost just 0.45% in a Guided Investing “robo” account at Bank of America’s Merrill Edge unit and 0.85% when the robo program is supplemented with advice from a Merrill Edge broker.
“Since there are different fee rates associated with how clients pay for ongoing advice and services for these programs,” Merrill market supervision managers were told in a recent memo, “we are requiring your review of identified accounts to assess whether the fee and/or investment strategy remain appropriate for the client.”
The review concentrated on accounts invested for at least one year exclusively in exchange traded funds with “environmental, social and governance” themes that Bank of America’s centralized investment office introduced last year across its wealth businesses, according to the memo reviewed by AdvisorHub.
Given the different service models, “it’s important to assess whether IAP clients are interacting with their advisors and receiving ongoing advice and guidance,” it said. Compliance managers were required to file their findings by Monday, September 23.
Big brokerage firms have moved toward home-office portfolio management—partly to limit liability when investments come from thousands of individual brokers—but the move coincides with a new regulatory focus on whether firms and brokers put clients’ interests ahead of their own when recommending investments. The Securities and Exchange Commission’s new Regulation Best Interest that is effective next June explicitly requires broker-dealers to consider the costs of recommendations.
“The concern in the industry is that a regulator would perceive it negatively if, for example, you have a robo advisor product putting the customer in asset allocations and ETFs, and your full-service suite product is doing the exact same thing,” said Kerry A. Zinn, a principal at law firm Bressler, Amery & Ross P.C. in Ft. Lauderdale, Fla.
Firm executives have argued that advisory account fees cover a broad range of goals-based financial planning and account services beyond investment advice. But the additional supervision routine imposed by Merrill, and stepped-up requirements for brokers across the industry to document the frequency and content of their contacts with clients, carry a risk of creating more work for advisors while harming investors, according to investor advocates.
“As Merrill innovates and introduces lower-cost tiers, it’s going to have to look at people who are in higher tiers and who are not being well-served by those arrangements,” said Benjamin Edwards, a securities law professor at the University of Nevada Las Vegas. “The danger for clients is that Merrill or another firm may cause its advisors to regularly have meetings, send emails and engage in small talk to generate the appearance of work, when they actually are not doing any real work to justify the fees.”
A Merrill spokesman declined to comment on what prompted the additional review of advisory accounts or how many accounts managed by its 14,700 Merrill Wealth Management brokers were examined.
Bank of America introduced its Merrill Guided Investing robo program in February 2017 and expanded the Edge service to occasional advice (Guided Investing with an Advisor) in November 2018.