Commonwealth offers brokers bridge financing as DOL takes toll in shift to fee-based IRAs

Advisers will get loans to help cover earnings shortfall following firm's decision to ban commissions

Nov 4, 2016 @ 12:56 pm

By Christine Idzelis

Commonwealth Financial Network, one of the biggest independent broker-dealers in the U.S., will offer its advisers financing to bridge a shortfall in cash flow that results from its recent decision to stop charging commissions in retirement accounts.

Commonwealth will provide short-term loans to help advisers cover a potential drop in earnings as it shifts to charging fees to comply with the Labor Department's new fiduciary rule, Rich Hunter, president of the brokerage firm, said Friday during the firm's national conference in Austin, Texas. The brokers may obtain loans amounting to 10% of their trailing 12-month revenue, according to a slide shown during the presentation.

The DOL rule, which takes effect in April, requires advisers to put their clients' best interests first and has firms split on whether continuing commission-based IRAs makes them more vulnerable to litigation. Commonwealth's decision last month to eliminate commissions on individual retirement accounts, or IRAs, followed the same move taken by Bank of America Merrill Lynch in early October.

Merrill's ban on brokerage retirement accounts shook the financial-advice industry and set off a series of announcements by other firms about their compliance strategies. Morgan Stanley and Raymond James Financial Inc., for example, have said they'll continue providing commission-based IRAs.

(More: Merrill Lynch tells advisers to stop selling mutual funds in brokerage IRAs now)

The division in how to handle the regulation could have a rippling effect in 2017 that pushes some advisers or clients to switch firms as the rule begins to take effect.

While some may want to change employers to keep collecting commissions for each transaction made by their clients, others may feel more comfortable with those that take a more drastic approach in banning them from retirement accounts.

Brokerage firms that allow advisers to keep charging commissions will have to disclose them under the best-interest contract exemption, a document that investors may later point to in litigation while claiming their brokers profited at their expense.

Firms must be fully compliant with the DOL fiduciary rule by January 2018.

(More: The DOL rule, from all angles.)


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