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JPMorgan Abandoning Commissions … Or Not?

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JPMorgan seems to be in a state of flux, along with other broker-dealers, in terms of what to do with plans to drop commissions in retirement accounts as part of its compliance with the Department of Labor’s new fiduciary standard.

A letter sent to clients earlier in March said they would be moved into self-directed accounts by April 7, if they had not already moved into a fee-based managed account or chosen the self-directed option. However, the letter also said any delay in the implementation of the rule would put a hold on the automatic shift.  

Financial analysts with Keefe, Bruyette & Woods say that a delay in the rule “telegraphs a potential strategic change if the rule is watered-down or scrapped, in our view.”

(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 ended Wednesday.)

JPMorgan’s move to push clients out of commission accounts was not anticipated by the KBW analysts Brian Kleinhanzl and Michael Brown, CFA. (The firm first alerted clients to expected shifts in its retirement services in November, according to a spokesperson.)

In light of reports last week about Merrill, we thought that JPM may also choose to utilize the best-interest contract (BIC) exemption and permit commission-based retirement accounts under certain circumstances,” they said in a note to investors on Wednesday.

“However, JPMorgan is not very big in the retirement business, so JPM’s ultimate decision to stick to the course laid out back in November makes sense to us,” they added.

Rule, No Rule?

What happens if the new fiduciary standard is not implemented as planned?

The KBW analysts expect that JPMorgan will probably push back changes to retirement accounts until regulators have released a clear plan for the fiduciary rule.

If the rule is watered down significantly, the two say, JPMorgan could opt “to follow peers that have opted to use the [best interest contract] such as Wells Fargo and Morgan Stanley, and if the rule is scrapped completely the company may walk away from plans to shift clients from commission-based retirement accounts to self-directed or fee based alternatives.”

The analysts caution that such steps do not jibe with their view of the firm’s possible strategies, “given JPM’s smaller relative exposure to the retirement business.”

Still, given the uncertainty surrounding the new DOL rule, they “would not be surprised to see additional announcements regarding compliance with the rule as it evolves.”

Merrill’s Move

Merrill Lynch told its Thundering Herd about a week ago 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,” Kleinhanzl and Brown said at the time.

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.

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.

This appears to be the de facto approach of an increasing number of broker-dealers at the present time.

— Check out DOL Puts Fiduciary Rule’s Right to Sue Under Microscope on ThinkAdvisor.