Morgan Stanley to keep commission-based IRA business despite DOL rule in contrast to Merrill Lynch

Morgan Stanley clients may also choose individual retirement accounts that are fee-based

Oct 26, 2016 @ 4:32 pm

By Christine Idzelis

Morgan Stanley will keep its commission-based IRA business when the Labor Department's fiduciary rule takes effect next year, taking a different course than Bank of America Merrill Lynch in complying with the new regulation.

Clients who prefer transaction-based pricing will have access to retirement brokerage accounts while receiving financial advice that complies with the DOL fiduciary rule and best interest contract exemption, Morgan Stanley announced Wednesday.

“We believe our advisers can most effectively uphold a fiduciary standard of care and work in clients' best interests by continuing to offer choice,” Shelley O'Connor and Andy Saperstein, co-heads of wealth management, said in the announcement.

Merrill Lynch was the first big brokerage on Wall Street to reveal plans for its compliance strategy, announcing earlier this month that it would stop commission-based IRAs and avoid using the best interest contract exemption under the Labor Department's new regulation.

The DOL fiduciary rule, which takes effect in April, requires financial advisers to put their clients' interests ahead of their own when making recommendations on retirement accounts. While the rule doesn't prohibit charging sales commissions, advisers must disclose them and any potential conflicts of interests under a best-interest contract exemption.

Morgan Stanley CEO James Gorman hinted last week at the decision to keep commission-based IRAs in remarks made during the firm's third-quarter earnings call, saying “choice has been a fundamental guiding light for the firm and that is unlikely to change.”

The retirement brokerage accounts will have a broad offering of investment products, including mutual funds and exchange traded funds, according to Wednesday's statement. Clients who prefer a fee-based retirement account will continue to have access to them, as well, Morgan Stanley said.

“Delivering a retirement account platform based on fiduciary principles that provides the widest possible capabilities and preserves client choice is our vote of confidence in our advisers' continuing commitment to placing client interests first,” Ms. O'Connor and Mr. Saperstein said in Wednesday's statement.

Many see brokerage firms moving toward fee-based revenue to help comply with the regulation.

Morgan Stanley's wealth-management unit reported an unprecedented $2.1 trillion of client assets in the third quarter. Fee-based assets represented 41% of the total, or $855 billion, a record for the brokerage firm, according to a spokesman for the bank.

As Wall Street rivals begin to reveal their strategy for complying with the fiduciary rule, some are raising the question whether some financial advisers may choose to move to firms that give them more flexibility with their clients.

During Bank of America Corp.'s third quarter earnings call on Oct. 17, chief financial officer Paul Donofrio dismissed the notion brokers working for its Merrill Lynch brokerage unit will defect en masse because of the firm's decision to stop paying commissions IRAs.

“The best-interest exemption is going to create confusion,” Mr. Donofrio said. “It's got operational pain for clients. It's going to be inefficient and cumbersome for advisers.”


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