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.
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.
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.