(Photo: AP)

Merrill Lynch told its Thundering Herd Thursday that it plans to explore “options” for at least some clients who might benefit from commissions in retirement accounts, a shift from its earlier fee-only approach to the new Department of Labor’s fiduciary standard.

Analysts say this step represents a sea change in the approach it outlined in October.

“Regardless of the ultimate path that Bank of America chooses to take, Pandora’s box has been opened, and the fee discussion is now front and center for clients, so whether or not the fiduciary rule is implemented in its current state may be a moot point,” according to Brian Kleinhanzl and Michael Brown, CFA, of Keefe, Bruyette & Woods.

(The Labor rule is expected to be delayed by 60 days; a 15-day comment period on plans to move the rule’s first compliance date from April 10 to June 9 ends March 15.)

Upside, Downside

The KBW analysts say there are advantages and disadvantages to a shift in Merrill’s previous fee-only approach.

Allowing some clients to use the best interest contract (or BIC) exemption could “mitigate financial advisor attrition,” they point out, since many rival firms – including Morgan Stanley and Wells Fargo Advisors – are poised to give its clients the option of using fee-based or commission-based retirement accounts.

Over the week, for instance, Janney Montgomery Scott and Raymond James said they had recruited advisors from Merrill Lynch with over $285 million in client assets. Also, Focus Financial lured a pair of Merrill reps to its independent RIA platform with some $575 million in assets.

On the other hand, not moving all clients to fee-based accounts “removes the operational benefits from opting not to use the BIC (i.e., compliance documentation),” Kleinhanzl and Brown point out, referring to best interest contracts.

Plus, the move to a more flexible approach means Bank of America may be “more exposed to legal fallout should the company experience breaches in the BIC.”

For clients, they analysts state, the shift seems to be a net positive.

“The company’s self-directed brokerage platform, Merrill Edge, was the only option for those who wanted to maintain a commission-based retirement account with BAC,” they explained.

While self-directed brokerage accounts are good options for many clients, they are not “the ideal replacement for all clients, in our view,” the analysts say.

Overall, more changes at Merrill are on the horizon.

“Given the uncertainty around the fate of the fiduciary rule, we would not be surprised if the company decided to give itself more optionality to deal with the final outcome,” they said.

Walk Back?

In discussing its latest views on the DOL matter, the firm’s wealth management chief, Andy Sieg, said that despite the “uncertainty in Washington,” Merrill Lynch is “steadfast in its commitment to provide investment advice in our clients’ best interests, particularly with respect to their retirement accounts.”

However, its executives have come to recognize “that there may be limited situations in which a fee-based arrangement would not be in a client’s best interests,” Sieg added.

Thus, the wealth business is reviewing “those limited circumstances” and considering possible alternatives to its fee-based Investment Advisory Program for some clients “in a manner consistent with a higher standard of care,” he adds.

Merrill is “prepared” to implement its approach to the DOL rule next month. But the firm’s executives acknowledge that its proposed delay “may provide us with additional time and flexibility as we work through these issues,” according to Sieg.

The wealth chief also told the Merrill advisors that product restrictions now in effect for retirement brokerage accounts will “remain in place, including restrictions on mutual funds.”

The Thundering Herd has some 537,000 clients in its fee-based IAP, with $208 billion of client assets in IRAs, representing more than half of its total IRA AUM.

(Others products with restrictions include nontraded REITs, life insurance, health saving accounts, education savings accounts and some other special investments.)