(Bloomberg Gadfly) — Every financial advisor in the country has been debating the Department of Labor’s new fiduciary rule, arguing about whether or not it’s really good for investors.
For my part, I’m on the record saying that the rule, which requires brokers who work with retirement accounts to put their clients’ financial interests ahead of their own, is a boon for investors.
One of the largest brokerages in the world, Merrill Lynch, has also thrown its immense weight behind the shift. It has introduced sweeping changes to its retirement accounts in response to the fiduciary rule, giving its investors myriad new choices about how to invest retirement savings and deciding how much to pay for advice.
The fiduciary rule is a broad standard, but it has a very specific consequence: With limited exceptions, the rule no longer allows mutual fund companies to pay brokers for selling their funds to clients. Why would you sell other products if it meant less money in your own wallet? Thanks to the Department of Labor, a decades-long compensation practice for brokers that was rife with conflicts of interest is now ending.
But in the weeks and months following the announcement of the fiduciary rule earlier this year, it wasn’t clear how brokerage firms would adapt. Would they embrace the spirit of the rule? Would they use the rule as an excuse to raise fees for retirement savers? Would they simply abandon those investors altogether?
The thundering herd
Edward Jones was the first major broker to announce changes to its practices, and the path it chose didn’t bode well for investors. Edward Jones said that it would stop offering mutual funds and ETFs to commission-based retirement accounts. Investors in those accounts would have to make do with stocks, bonds, variable annuities and certificates of deposit. If they didn’t like those choices they would have to move to a managed account that charges a pricier asset-based fee.
I suggested that Edward Jones instead try to:
- Expand mutual fund options to include index and other low-cost funds;
- Allow clients to choose between a managed account that charges an asset-based fee and a self-directed account that charges commission-based fees; and
- Only accept fees from its clients in order to minimize conflicts of interest.
As far as I can tell, Edward Jones isn’t doing any of that.
But Merrill is. Its retirement clients will be able to choose between a managed account that charges an asset-based fee and a do-it-yourself brokerage account that charges commissions. Both options will offer a full range of investment options, including index funds. Most important: Merrill will take fees from its clients, and nobody else.