Broker-dealers split on commissions in wake of DOL fiduciary rule

Morgan Stanley, Ameriprise Financial, Raymond James and others announced whether they will retain commissions under new regulations.

Oct 30, 2016 @ 12:01 am

By Greg Iacurci and Christine Idzelis

After months of silence, large brokerage firms are beginning to announce their strategies to comply with the Labor Department's fiduciary rule.

Morgan Stanley, Ameriprise Financial Inc., Raymond James Financial Inc. and Commonwealth Financial Network last week showed their cards, finally answering the question that's weighed on their advisers and the broader financial services industry: Would they keep commissions on retirement accounts intact, or shift to an entirely fee-based advisory environment?

Commonwealth stood alone among the group with its proclamation of a wholesale shift away from commissions in IRAs and qualified retirement plans come April, when the regulation starts to kick in.

That's following in the strategy of Merrill Lynch, which is scrapping new commission IRAs in favor of advisory accounts, which charge a level fee on assets under management.

This month, Merrill became the first of the so-called wirehouses to announce compliance plans with the DOL rule, which seeks to raise investment advice standards in retirement accounts.


Morgan Stanley, Ameriprise and Raymond James definitively split with the approach of their counterparts by allowing advisers to operate in both a commission and fee-based capacity.

“We've got Merrill and Morgan on the opposite sides of the spectrum,” said Mindy Diamond, president and CEO of recruiter Diamond Consultants Inc.

“Because the DOL left a lot of this up for interpretation, it's not surprising that you have two big competitors opting for different conclusions,” she said. “Both are reacting to the new world order.”

Two other large broker-dealers, LPL Financial Inc. and Edward Jones, earlier announced they would keep commissions, with some modifications.

Retirement accounts offered under DOL fiduciary rule
Company Fee Commission and fee
Edward Jones*
LPL Financial
Merrill Lynch
Morgan Stanley*
Raymond James
Note: *May not initially offer all investment products on commission basis

Analysts have said the fee-based business model is less risky under the DOL rule. Selling investment products such as mutual funds and variable annuities on commission will require using the best-interest contract exemption, or BICE, which allows for variable compensation if certain standards are met, but which also gives investors the right to bring class-action lawsuits against brokerages if they feel they've been wronged.

“This whole thing is like looking at an iceberg,” said Chris Finefrock, vice president of investments at ValMark Securities Inc. “We're looking at this iceberg from above the water, and the only way we'll see the breadth and depth of the iceberg” is through future lawsuits — the outcome of which may indicate who ultimately took the best approach.

(Related read: A comprehensive, searchable database of advisers' fiduciary FAQs)

For their part, Morgan Stanley and others opening themselves up to this sort of risk say providing account choice serves their clients' best interests.

Danny Sarch, president of recruiting firm Leitner Sarch Consultants, said the division in how to treat IRAs can be seen as a type of “marketing war,” with Merrill on the one side pointing to themselves as “true fiduciaries” and Morgan on the other saying they adhere to the best-interest standard while providing clients with choice.


It's possible the full-service brokerage units of Wells Fargo & Co. and UBS Group AG, the two wirehouses that haven't made DOL compliance announcements, will opt for something in between the Morgan and Merrill camps, according to Ms. Diamond. That might mean allowing commission-based IRA accounts and use of the BICE but offering a more limited selection of investment options to clients, according to Ms. Diamond.

Spokespeople for Wells Fargo and UBS declined to comment on their compliance strategy."If I am a company that has a large base of a certain type of client, I'm not going to just close my doors on them."--Denise Valentine, senior analyst, Aite Group

“There's no right or wrong. It's a function of what the firms feel is appropriate for them,” according to Denise Valentine, a senior analyst at Aite Group who covers wealth management.

That consideration combines ideology, company resources, operations and technology, she said. It also includes looking across their client base to see what percentage prefer commission-based relationships to one tied to fees, according to Ms. Valentine.

“If I am a company that has a large base of a certain type of client, I'm not going to just close my doors on them,” she said.

(Related read: DOL releases first batch of FAQs on fiduciary rule)

On its face, Commonwealth's shift seems like it won't have a big impact on advisers, since it derives less than 10% of its revenue from commissions on retirement accounts.

And Merrill Lynch, much like the broader industry, has been migrating toward a more advisory-centric business model for several years, analysts said. Just over 60% of Merrill advisers have 50% or more of client assets in a fee-based relationship, company spokesman Matthew Card said. He declined to specify how much in client assets is held in brokerage versus advisory accounts.7Number of B-Ds that recently announced whether they will retain commissions under new regulations

On the other hand, even though Morgan Stanley's wealth management unit reported a record $855 billion held in fee-based assets as of the end of the third quarter, that represented only 41% of the total.

But looking at where revenue is coming from isn't the only factor going into the decisions of broker-dealers. Ameriprise holds the majority — 70% — of its wealth management assets in fee-based businesses, CEO and chairman Jim Cracchiolo said during the company's third-quarter earnings call.

Further, each company's announcement hasn't been a black-and-white declaration. That's especially true for those companies that are opting to keep commissions.

Ameriprise said it would likely “narrow” its platform of investment products for advisers, for example. And while Morgan Stanley said it would have a broad offering of investment products come April, some annuities and alternative investment products may not be immediately available to investors because they depend on pricing decisions made by the product manufacturers, according to a spokeswoman.

(Related read: DOL fiduciary rule FAQs emphasize dangerous compensation practices — including for RIAs)

LPL will impose level commissions by investment category to avoid the appearance of a conflict of interest at the point of sale.

Commonwealth said it would ditch 401(k) as well as IRA commissions. But Merrill has been silent on the point of its approach to 401(k) plans, short of saying its institutional retirement business “will require some operating and product modifications.”

A spokeswoman said a more detailed announcement is coming.

Commonwealth's announcement made no mention of offering fee discounting on accounts moved over to an advisory relationship, something which Merrill is doing in an attempt to equalize the fee level for those transitioning to advisory, especially for the low-trading brokerage customers. Spokespeople declined additional details as to the level and time limit on discounts.


Mr. Sarch isn't expecting the initial wave of declarations on DOL compliance strategies to create much attrition across the wirehouses. He said it will take time for advisers to gauge how comfortable they feel with their firms' strategies, and that probably won't be evident until next year.

However, some experts predict there will be movement.

“There is going to be a void in the industry where Merrill stepped away from commission-based relationships,” according to Daniel Bernstein, chief compliance counsel at consulting firm MarketCounsel.

Advisers who count that as an integral part of their business “might look for a new home” along with some clients, he said.


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