Merrill's move to end commission IRAs a 'tectonic shift' for brokerage industry

Decision could signal a sea change in the industry by pressuring other wirehouses to "keep up with the Joneses" — and could lead to adviser attrition

Oct 7, 2016 @ 1:04 pm

By Greg Iacurci

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Merrill Lynch's decision to shutter its commission IRA business in response to the Labor Department's fiduciary rule could signal a sea change in the brokerage industry, and could push Merrill brokers reliant on commissions to find another home, according to industry observers.

“I think the Department of Labor regulatory initiative is a game changer in the industry, and we are going to see more tectonic shifts,” Marcia Wagner, principal at The Wagner Law Group, said.

Merrill on Thursday became the first of the wirehouses to announce compliance plans with the DOL fiduciary rule, which raises standards for providing investment advice in retirement accounts.

The firm, which houses more than 14,000 advisers, will no longer offer new, advised commission-based individual retirement accounts beginning April 10, the implementation date for the rule. Rather, it will migrate clients to its advisory platform, self-directed brokerage or robo advisory service.

And, it could push the other large brokerages to respond in a similar way.

“This is probably the first wirehouse to go fully this way in direct response to the rule, but it's not going to be the last,” Jamie Hopkins, a professor in the retirement income program at The American College of Financial Services, said. “I'd expect other wirehouses and brokerage firms to move in this direction. Part of it is keeping up with the Joneses.”

While moving to fully fee-based business helps firms avoid some of the more onerous provisions of the rule — which was indeed a primary motivator for Merrill's decision — there won't necessarily be a mass exodus by other firms toward fees over commissions, analysts said.

However, because firms are in a wait-and-see mode, feeling out how competitors are seeking to comply, firms that haven't yet decided may use Merrill's announcement to “help inform their approach,” according to Micah Hauptman, financial services counsel at the Consumer Federation of America.

Some firms such as Merrill had already begun a push toward fee-based over commission business prior to the DOL rule being finalized, because fee revenue is seen as more predictable and stable than that derived from commissions. Those firms may naturally gravitate toward a similar model to Merrill's.

“For firms taking a more advisory-centric approach, I think [Merrill's move] makes sense,” Mr. Hauptman said. “I wouldn't speculate to say firms are going to shift, en masse, clients from commission-based accounts to advisory accounts because they're afraid of the rule.”

Indeed, LPL Financial, the nation's largest independent broker-dealer, is still planning to offer a commission-based option to investors. LPL and other firms are seeking to reduce the appearance of conflicts of interest by making commissions the same for particular product lines.

“I think what we're seeing at this point is that different financial institutions are taking different approaches,” David Levine, principal at Groom Law Group, said. “We're bound to see a number of these decisions and they may go different ways in the following months.”

However, observers point out that offering commission retirement products exposes broker-dealers to more risk under the DOL rule, namely through the signing of a contract that increases the possibility of class-action lawsuits from investors.

Andrew Oringer, partner and co-chair of the employee benefits and executive compensation group at Dechert, said there may be some broker-dealers, in certain contexts, that say they're no longer interested in dealing with IRAs altogether, whether fee or commission accounts.

For Merrill, ditching its commission IRA business may upset some brokers and ultimately cause them to depart, observers speculated.

“I would assume some of the financial advisers very much want to continue a commission-based model, especially with respect to IRAs, and this is a pretty significant decree saying it's not going to be available because of the new rule,” Ms. Wagner said. “I don't think all advisers will easily, willingly, or happily give up their ability to practice brokerage like they always had.”

Mr. Oringer agreed attrition could be a possibility, but with a caveat.

“For brokers that want to continue this commission IRA business where the business is being moved, I think that some of them may wind up exploring other avenues where they can try to continue what they had been doing before,” Mr. Oringer said. “But don't be so sure it will be overly easy to find those other avenues.”

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