Morgan Stanley may not follow Merrill Lynch's lead to ban IRA commissions

The firm will announce details of its strategy to comply with the DOL fiduciary rule in next two weeks

Oct 19, 2016 @ 11:29 am

By Christine Idzelis

Morgan Stanley may not be following Bank of America Merrill Lynch's lead in discontinuing commission-based IRAs.

In a conference call Wednesday on its third-quarter earnings CEO James Gorman said Morgan Stanley would announce its plans concerning the Labor Department's new fiduciary rule for retirement accounts in the next couple of weeks.

While declining to jump ahead of the firm's upcoming announcement, Mr. Gorman did say in reply to an analyst's question about its compliance strategy that “choice has been a fundamental guiding light for the firm and that is unlikely to change.”

New regulation from the Labor Department that requires financial advisers to put their clients' interests ahead of their own is reshaping the way brokerage firms do business. Bank of America Merrill Lynch this month announced it would stop commission-based individual retirement accounts and keep its brokers from using the best-interest contract exemption.

(More: The most up-to-date information on the DOL fiduciary rule)

“The best-interest exemption is going to create confusion,” Bank of America's chief financial officer Paul Donofrio said during the bank's third-quarter earnings call Monday. “It's got operational pain for clients. It's going to be inefficient and cumbersome for advisers.”

While the DOL's fiduciary rule doesn't prohibit charging sales commissions, advisers must disclose them and any potential conflicts of interests under a best-interest contract exemption. Many see brokerage firms moving toward fee-based revenue to help comply with the regulation, which takes effect in April.

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.

“More and more money is going to fee-based accounts,” Mr. Gorman said during the call.

The wealth-management unit saw $13.5 billion of fee-based asset flows in the third quarter, up 75% from the same period a year earlier and a 13% increase from the second quarter, according to the Morgan Stanley spokesman.

The unit's $3.9 billion of record revenue rose 7% from the third quarter last year, the spokesman said. Pretax profits of $901 million and a pretax margin of 23% were the highest since Morgan Stanley Smith Barney, the bank's wealth-management business, was created seven years ago, he said.

“Wealth management performed very well and continued to provide stability in the third quarter,” Jonathan Pruzan, Morgan Stanley's CFO, said during the earnings call. “Despite retail investors remaining cautious, we have good momentum in this business.”

The unit's pool of financial advisers was “stable,” according to the spokesman. Headcount rose to 15,856, up 49 from the third quarter last year, he said. It declined by 53 from the second quarter.

This month, Massachusetts charged Morgan Stanley's wealth-management business with conducting unethical, high-pressure, sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts. Morgan Stanley has said the complaint is without merit and that it plans to defend itself “vigorously.”

In addressing the Oct. 3 charges made by Massachusetts Secretary of the Commonwealth William Galvin, Mr. Gorman said on the earnings call that the brokerage firm hasn't altered the way it conducts its business.

“We are not changing things,” Mr. Gorman said. “We run our business consistent with the values of doing everything we can to support our clients and we will continue to do that.”

The wealth-management business posted record client loan balances of $70 billion, according to the Morgan Stanley spokesman.


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