Merrill Lynch reverses policy on banning IRA commissions following death of DOL fiduciary rule

Wirehouse cites client demand and a new regulatory environment in deciding to abandon its pioneering stance on commission IRAs

Aug 30, 2018 @ 10:15 am

By Greg Iacurci

Merrill Lynch is reversing its ban on commissions in individual retirement accounts, undoing a first-of-its-kind policy among the major brokerage firms that was established nearly two years ago as the Department of Labor fiduciary rule loomed large.

The wirehouse, which has about 17,400 financial advisers, is instituting the new protocol on Oct. 1, along with additional adviser oversight and new client disclosures. Executives cited client pressure and a new regulatory environment as the primary factors behind the change.

The announcement represents a stark shift for Merrill Lynch, which in October 2016 mandated that advisers only use an advisory account with a flat fee — as opposed to a brokerage account with a commission — when making investment recommendations involving clients' IRAs. It launched an advertising campaign around its decision shortly thereafter, saying its approach was in the best interest of investors. The ad was titled: "We're committed to your best interest. Not the status quo."

Merrill announced the new commission policy Thursday in a memo to advisers.

"In response to client feedback, we're announcing steps today that will provide our clients with greater choice and flexibility, while maintaining our support for a Best Interest standard for investment advice across all accounts," Andy Sieg, head of Merrill Lynch Wealth Management, said in a statement.

Danny Sarch, the founder and owner of adviser recruiting firm Leitner Sarch Consultants, called the decision "hypocritical."

"I think Merrill got out ahead of the curve, and the curve changed," Mr. Sarch said. "I think that's why they had to reverse themselves."

Merrill is, however, keeping its commission ban in place for annuity products — advisers will only be able to sell fee-based annuities into IRAs with clients, according to a senior Merrill Lynch executive with knowledge of the firm's new policy. Annuities are a "more complex product" and the firm wants to ensure annuity holders receive ongoing advice, said the executive, who requested anonymity.

Merrill instituted its IRA commission ban in response to the Department of Labor fiduciary rule, which raised investment-advice standards in retirement accounts such as IRAs and 401(k)s. The rule, which partly went into effect in June 2017, exposed brokerage firms to legal risk in the form of class-action lawsuits in the event that advisers recommended a commission product.

The wirehouse initiated a formal review of its commission policy after the DOL fiduciary rule was taken off the books in June this year, following a court ruling against the regulation by the Fifth Circuit Court of Appeals. Merrill's reversal is the culmination of that review.

The senior Merrill Lynch executive said the firm believed its "hands were tied" by the fiduciary rule. The appellate court ruling, the executive said, enabled the firm to "be in a position to offer choice again to clients." Clients began asking questions with "increasing intensity" after the court ruling, wondering why Merrill's commission stance was stricter than rest of the industry, the executive said.

The majority of brokerage houses decided to keep commissions intact despite the Obama-era regulation. Only a few, such as Commonwealth Financial Network and JPMorgan Chase & Co., decided to follow Merrill's path and scrap commissions altogether.

"I don't think it is necessarily duplicitous," Denise Valentine, a senior analyst at Aite Group, a consulting firm, said of Merrill Lynch's reversal.

"They took a position," Ms. Valentine added. "I think you position what you feel is best for the client, but in the end it's the client's money."

About one-third of the $150 billion in client assets held in a Merrill Lynch brokerage IRAs at the outset of the commission ban shifted to advisory accounts, according to the senior executive. The remaining $100 billion in commission IRA accounts represents around 5% of the total $2.3 trillion overseen by Merrill Lynch Wealth Management.

"This is going to be a bit of mud in the face and an annoyance for advisers and clients who switched to fees, but it's essentially staying current with the regulations," Mr. Sarch said. "Unfortunately, the industry has been whipsawed back and forth a few times," he added, referring to the change in presidential administration and regulatory environment.

Merrill Lynch began signaling a potential shift in its commission position shortly after President Donald J. Trump took office in January 2017. In May of that year, executives said advisers would be allowed to use "limited purpose brokerage IRAs" in some unique client situations.

Merrill's full reversal is the latest indication that the death of the fiduciary rule is having a profound effect on the brokerage and broader financial-services industry. Fidelity Investments, for example, recently walked back a "point in time" fiduciary investment service it had instituted for 401(k) plan sponsors. And sales of variable annuities, considered risky for brokers under the DOL rule, increased in the second quarter for the first time since 2014.

In addition to its new commission policy, Merrill Lynch is trying to beef up its adviser supervision.

It will extend to situations involving "more complex products, products with higher sales charges, as well as circumstances where we see a client over a period of time paying more in a brokerage relationship than they would have in investment advisory," for example, the Merrill executive said.

Concurrently, Merrill is adding new client disclosures, which it believes will be in line with the investment-advice regulation the Securities and Exchange Commission is working to finalize. Disclosures will include a summary of programs and services, a brokerage relationship summary, and summary information about fees for services and transactions. The new oversight and disclosures apply to accounts beyond just retirement, such as taxable and tax-exempt accounts.

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