Merrill to Restore Commission-Based Retirement Accounts
Merrill Lynch is restoring the option of commission-based retirement accounts for retail brokerage customers as of October 1, backing off its controversial first-mover ban on such accounts two years ago.
The decision, being announced to Merrill’s 14,820 brokers Thursday morning, follows a 60-day review of the policy promised by Merrill Wealth Management head Andy Sieg and puts a seal from the industry giant on the judicial death of the DOL fiduciary rule in June.
It’s also a cry-uncle acknowledgment from Merrill Lynch that many clients resisted its attempts to move them into “advisory” accounts that charge fees based on money in the accounts rather than transaction-based commissions, even when they were offered price breaks.
Merrill had told brokers that they could discount fees to any level they wanted on converted commision accounts and still be compensated, but a core group of primarily older customers with plain-vanilla portfolios resisted, said a senior Merrill Lynch executive who spoke on condition of anonymity.
“They wanted to have what they felt was control over paying whenever they transacted,” the executive said when asked to describe the review’s most surprising conclusion. “That came through pretty loud and clear. They just didn’t want to pay a fee, even if at the same level or lower” than what they were paying in commissions.
Customers also were questioning why Merrill’s restrictions were so much tougher than many of its rivals, the executive said. Bank of America, Merrill’s parent company, had feared a spate of class-action lawsuits if commission accounts had been offered under complex contractual exceptions that the DOL fiduciary rule allowed.
“We thought the rule essentially precluded commission accounts,” the executive said.
The policy change will affect about $100 billion of customer assets that remain in “limited-purpose” brokerage retirement accounts holding money-market funds, brokered certificates of deposit and cash, the executive said.
As of October 1st, those accounts will be freed up for almost all transactions. The only asset-class exception in retirement brokerage accounts will be annuities, which will remain restricted to purchase in investment advisory programs because of their complexity and their highly variable fee structure, the executive said.
Merrill also is using the change to justify what it is calling enhanced supervisory routines.
Aimed at ensuring that customers’ best interests are being served in congruence with a new care standard that the Securities and Exchange Commission is developing for both retirement and taxable accounts, the changes will include a variety of new reports, technologies and procedures related to account openings and ongoing monitoring of client fees and activities.
Merrill earlier this year added alerts to broker workstations to help advisors monitor factors such as client age, level of wealth and portfolio diversification in advisory accounts. As part of the upgraded compliance procedures, the firm will also deliver to customers, and post on its website, new summaries of programs, services and associated fees that it and Bank of America offers and attempt a plain-English explanation of the obligations brokers have to customers based on account types.
Merrill is continuing to tell advisors that it prefers they recommend fee-based advisory accounts, which provide steady revenue regardless of customer activity and are more litigation-proof because investments in them are generally based on firm models or made by third-party managers.
“In response to client feedback, we’re announcing steps today that will provide our clients with greater choice and flexibility, while maintaining our support for a Best Interest standard for investment advice across all accounts,” Sieg said in a prepared statement.
A Merrill spokesman would not comment on how many customers or assets have moved from the firm as a result of the retirement-account restrictions. The $100 billion that has remained in limited-purpose commission-based retirement accounts represent only about 5% of the $2.3 trillion that retail customers keep with Merrill.
Only about $50 billion moved from commission to advisory accounts after Merrill instituted the retirement account restrictions in early 2017, and the firm does not expect many customers who have already converted to revert back to commission accounts, the executive said.
–Mason Braswell contributed to this story.