Close Close

Regulation and Compliance > Federal Regulation > DOL

DOL Delay Leads to Some Regrouping at BDs

Your article was successfully shared with the contacts you provided.

Merrill Lynch recently told its Thundering Herd 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 Department of Labor’s fiduciary rule. Analysts say this step represents a sea change in the approach it outlined last October.

“Regardless of the ultimate path that [Bank of America Merrill Lynch] 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 regarding plans to move the rule’s first compliance date from April 10 to June 9 ended on March 17.

A recent J.D. Power survey finds that a delay and even a weakening of the standard would suit most clients just fine. Almost 60% of full-service investors paying commissions say they “probably will not” (40%) or “definitely will not” (19%) stay with their current firm if they must move to fee-based retirement accounts.

In fact, the group’s February poll finds that a quarter of high-net-worth investors “definitely would not” switch to a fee-based account if it had a 1% fee. More than half, or 52%, of investors with $1 million or more in investable assets “definitely would not” move to a fee-based account that charges 2%.

Upsides of Fee-Only Approach

The KBW analysts said there are other advantages and some 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 their clients the option of using fee-based or commission-based retirement accounts.

Just in the first half of March, for instance, Raymond James, Janney Montgomery Scott and others have recruited advisors from Merrill Lynch. Raymond James, for example, said it added advisors David Lum and Michael Piazza to its employee channel in Stuart, Florida, with about $220 million in client assets and some $1.7 million in yearly fees and commissions.

Lum began his financial services career in 1981 at E.F. Hutton. He joined Prudential Securities in 1988 and became an advisor, moving to Merrill Lynch in 1999. Piazza cut his teeth as an intern with Merrill Lynch in 2010; during his off-seasons, he was a professional baseball player with the Los Angeles Angels and Colorado Rockies (not to be confused with baseball Hall of Famer Mike Piazza, a distant relative). He became a full-time financial advisor in 2015.

The Trump rally has been good to Raymond James Financial, which is now part of the S&P 500 index, thanks to the fact that its market capitalization has topped $10 billion. “We are honored to be included with this prestigious group of companies,” said Chairman and CEO Paul Reilly in a statement.

HighTower Advisors says a Merrill Lynch team has gone independent and joined it as a partner: Ewing/Cona Wealth Management in Marlton, New Jersey, is run by Jim Ewing and Michael Cona, who have about $200 million in client assets. This is the fourth team to move to HighTower in 2017.

“Financial advisor teams like Ewing/Cona Wealth Management come to HighTower to accelerate the growth of their businesses among a community of like-minded peers in a fiduciary environment,” said HighTower CEO Elliot Weissbluth in a statement. “The HighTower culture, brand and platform reflect our signature ‘by-advisors-for-advisors’ approach.”

Ewing has about 18 years of industry experience and served as a wealth management advisor at Merrill Lynch for nearly a decade, after working as a registered rep for A.G. Edwards and two other firms. Cona oversees the financial planning process for Ewing/Cona Wealth Management; he was with Susquehanna Capital from 2000 to 2005, before moving to Merrill.

Loss of Operational Benefits

On the other hand, Merrill’s decision to not move all clients to fee-based accounts “removes the operational benefits from opting not to use the BIC (i.e., compliance documentation),” Kleinhanzl and Brown pointed 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, the analysts stated, 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 said.

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 stated.

Merrill Walks Back Fee-only Plan

In discussing its latest views on the DOL matter, the wirehouse’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 added.

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

Merrill 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.

JPMorgan in Fee-Based Flux

Meanwhile, JPMorgan seems to be in a state of flux in terms of what to do with its plans to drop commissions in retirement accounts as part of its compliance with the 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.

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

JPMorgan’s move to push clients out of commission accounts was not anticipated by Kleinhanzl and Brown, who suggested that in light of recent reports, the firm “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.

“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 release a clear plan for the fiduciary rule.

If the rule is watered down significantly, the two said, JPMorgan could “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 cautioned 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.”

According to J.D. Power, investors who do not want to pay fees to broker-dealers for their retirement accounts can find other full-service firms to work with, of course. They also can move to a self-directed or robo-service model that allows them to pay commissions or lower fees; firms that do not offer investors alternatives “are likely to lose clients across the board, and in some cases their advisors may leave with them,” the research firm said.

— Read