From the June 2017 issue of Investment Advisor • Subscribe!

Wirehouses Keep Tweaking Plans, Policies Ahead of DOL Deadline

Merrill Lynch and Morgan Stanley share details on their latest maneuvers, as UBS provides tech-related updates — and all three post quarterly results

Wirehouses gave reps more guidance ahead of the DOL fiduciary rule's June 9 compliance date. Wirehouses gave reps more guidance ahead of the DOL fiduciary rule's June 9 compliance date.

After discussing the possibility that advisors could keep commissions in some retirement accounts earlier this year, Merrill Lynch has been giving its roughly 14,500 advisors more details on its change of heart. Merrill says it assumes it will need to conform to the new Department of Labor's fiduciary standard by June 9 — though that deadline is increasingly in doubt.

[Editor's Note: The Department of Labor announced on May 22 that the compliance date of the fiduciary rule would not be delayed again.]

Andy Sieg, head of wealth management, told the Thundering Herd of about 14,500 registered reps that they could take a non-fee-based approach in “limited situations.” The firm says it is adding products to its Investment Advisory Platform (or IAP), with advisory-share class annuities to be made available by June 1. Hedge funds, new-issue CDs and market-linked investments should be rolled out soon.

Merrill is also helping clients move from existing brokerage IRAs to Investment Advisory accounts with “pricing flexibility, including rebates on mutual fund share class exchanges,” Sieg told reps in a memo.

(Related: Merrill to Pay Fine Over Trading, Disclosure Issues)

The firm's tweaks to its interpretation of the DOL rule make sense, according to recruiter Mark Elzweig. “There are a lot of moving parts here … , [and] advisors will welcome any changes that expand their options in handling retirement accounts,” he said.

Starting June 12, a limited purpose brokerage IRA will also be available to clients. It initially can be used for cash and bank deposits only, but later will include a “limited product set,” such as money funds, brokered CDs and concentrated stock positions (i.e., employer rollovers or transfers).

“For these limited situations, we will use the Best Interest Contract exemption,” Sieg explained. High-net-worth clients — with over $50 million of assets — will be able to buy hedge funds and private equity via the BIC exemption.

The firm is also creating a temporary restricted account, a “transition” retirement account for holding new assets and securities coming into the firm prior to the client and advisor's choosing of a suitable investment platform. “It is also a status for account terminations from an investment advisory program. Commissions will not be charged, and product credits will not be earned,” Sieg added.

These changes come about six months after Merrill Lynch outlined its earlier fee-only approach to the new DOL rule. The firm has some 537,000 clients on its fee-based IAP, with $208 billion of client assets in IRAs, representing more than half of its total IRA AUM.

Morgan Stanley Cutting Products

Along with other firms, Morgan Stanley is pushing some product providers off its platforms ahead of the now-delayed Department of Labor fiduciary standard. News reports circulated in May that the firm's advisors may get less or no compensation for assets that clients want to keep in these holdings.

Morgan Stanley's 15,700-plus reps can no longer offer new sales of Vanguard mutual funds, though they can sell Vanguard ETFs. Clients who previously bought and are holding these funds in their accounts are not being asked to sell them, and they can expand these positions until early 2018.

Such moves are being questioned by fund specialists like Paul Ellenbogen of Morningstar. “How do you explain that on a BIC [best interest contract] basis?” asked the firm's head of global regulatory solutions. “It's not like these [Vanguard] funds are pricey or of poor quality, ... [and] this seems to be all about compensation to the advisor, not about the client or asset management.”

The wirehouse told its reps in April that it was making a series of pricing, policy and product changes “regardless of the status of the DOL rule that were designed to further raise the standard of care for our clients,” according to a statement.

These changes entailed dropping the number of funds available to clients by 25%. “While the funds we are closing to new sales (including Vanguard) represent less than 5% of the total mutual fund assets held by our clients, this reduction will allow us to increase our research coverage and due diligence on the funds remaining open,” the firm said.

Earnings News

Morgan Stanley said its wealth unit boosted pretax net income by 24% in the first quarter to $973 million. Revenue grew 11% to $4.1 billion.

On a conference call with equity analysts, CFO Jonathan Pruzan gushed about its performance. The unit's pre-tax margin, 24%, was the highest since the firm acquired Smith Barney, he said.

Total client assets hit $2.2 trillion at Morgan Stanley as of March 31, and fee-based assets grew 6% to $927 billion, including net asset flows of $19 billion. “This represents the highest fee-based asset flows since the fourth quarter of 2014,” Pruzan added.

While fee-based flows are up thanks to DOL, the movement of advisors has generally come to a standstill. “It probably has had a chilling effect on recruiting, [and] attrition has been low,” the executive said. The latest figure for Morgan Stanley advisors is 15,777, up 14 advisors from Q4’16 but down 111 (or 1%) from Q1’16.

When it comes to average yearly fees and commissions per advisor, Morgan Stanley tops Merrill by a hair at $1.02 million versus the Thundering Herd's $999,000. Merrill says that its level for veteran advisors is around $1.3 million.

Though the number of Merrill Lynch advisors grew by 72 from a year ago, the total figure fell 145 from last quarter to hit 14,484 as of March 31. Assets held in Merrill accounts were $2.2 trillion, a jump of $169 billion (or 9%) from a year ago. The group's revenue was nearly $3.8 billion.

BofA's broader Global Wealth & Investment Management unit had net income of $770 million, up 4% over last year, as revenue grew 3% year over year to $4.6 billion. Its pre-tax margin was 27%, while total client assets were close to $2.6 trillion.

UBS News

UBS Group says it plans to grow sales of banking products and lower its level of recruitment loans to advisors in the Americas. Its wealth management business in the Americas increased operating income by 8% from last year to $2.05 million thanks to higher recurring net fee income, net interest income and transaction-based income. The group's pretax profit soared 42% year over year to $302 million.

While by some measures the U.S.- and Latin America-based financial advisors continue to top the charts, its FA headcount is shrinking. As of March 30, the group has 6,986 registered reps, down from 7,025 in December and 7,145 a year ago.

As CFO Kirt Gardner said on a conference call, “Last year, we introduced a new operating model in Wealth Management Americas, and we now focus more on increasing retention and productivity and are de-emphasizing recruiting.”

Gardner said that compared to rivals like Morgan Stanley, Wells Fargo and Bank of America, UBS has a lower level of sales of bank products. Part of the reason for this, he pointed out, is that these competitors serve as the “primary bank” for its wealth clients, which is a role that UBS does not have.

Recruitment loans to new advisors are moving in the opposite direction. These loans “have already come down to below $3 billion, and you’ll continue to see those volumes come down,” the CFO said on the call. UBS Americas built up a “higher concentration of recruitment loans … after the [financial] crisis when we had a high degree of recruitment,” he explained.

“I would finally just note that we continue to have the highest level of productivity amongst our FAs in the industry, and we expect to continue that as we look at focusing on the productivity of our FAs rather than the number of FAs we have deployed in the business,” Gardner said.

Average yearly fees and commissions (or production) per advisor in the Americas unit stands at $1.174 million while the average asset level is $165 million. UBS Wealth Management Americas’ clients have close to $1.2 trillion in total assets with the firm, up from roughly $1.1 trillion a year ago.

Tech Tools

UBS says it has struck a deal with BlackRock and expanded one with Solium Capital to roll out more technology to its 7,000 advisors in the Americas. The news comes a year after it formed a partnership with robo-advisor SigFig.

The Wealth Management Americas unit is working with BlackRock to offer Aladdin tools to both its registered reps and home office employees. UBS says it is the first U.S. wealth manager to use Aladdin's risk management and portfolio construction tools, which let advisors and others analyze portfolios with risk and return analytics that BlackRock Solutions provides to institutional investors.

The Aladdin rollout will start in the summer to advisors who manage discretionary portfolios and will later expand to more FAs and client portfolios. The tool serves as a multi-asset analytics engine that reviews portfolios with stocks, bonds, mutual funds, ETFs, options and structured products using a factor-based approach.

In other news, UBS is expanding its partnership with Solium Capital to add about 50 new features and create a new corporate equity plan platform, UBS “Plan Admin Pro.” The platform will rely on Solium's Shareworks and will give UBS corporate clients access to more equity plan administration capabilities starting in the third quarter. Equity Plan Advisory Services, or EPAS, are handled by about 200 UBS financial advisors.

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