Commonwealth CEO says firm considered SEC criticism in weighing DOL rule strategy

Some of the thinking behind Commonwealth Financial Network’s decision to ban commission-based retirement accounts lays bare the complications that broker-dealers face in trying to comply with the Labor Department’s new fiduciary rule.

Charging commissions could draw scrutiny from the Securities and Exchange Commission because of discrepancies that emerge between the individual retirement accounts, or IRAs, and other brokerage accounts, according to Commonwealth’s CEO Wayne Bloom. The firm would have cut the number of mutual funds offered in commission-based IRAs to provide lower, level pricing to comply with the rule, Mr. Bloom said Saturday during an interview at Commonwealth’s national conference in Austin, Texas.

The deliberation underscores how carefully brokerage firms have been preparing for the DOL fiduciary rule since the final version, released seven months ago, began disrupting their business models. Their months of planning may be shaken again by Donald Trump’s win this week in the U.S. presidential election, as speculation builds that the regulation could be killed when he takes office next year.

The regulation, which takes effect in April, requires financial advisers to act in the best interest of their clients when making recommendations for their retirement accounts. Keeping brokerage IRAs could prompt the SEC to question why the fund selection in commission-based accounts that fall outside the Labor Department’s rule aren’t being similarly altered in clients’ best interests, Mr. Bloom said.

Commonwealth, an independent broker-dealer based in Waltham, Mass., is moving to fee-based IRA accounts because of the DOL’s fiduciary rule. The regulation is expected accelerate the brokerage industry’s shift toward charging fees tied to the amount of assets in an account or time spent providing financial planning for a client. While registered investment advisory firms, or RIAs, must also comply with the rule, many see them less impacted due to their existing fee-based business models.

“When you pull back the curtain,” Commonwealth looks more like an RIA firm, said Mr. Bloom, noting that about 80% of the privately-held broker-dealer’s revenue is fee-based.

The DOL fiduciary rule doesn’t prohibit charging commissions for each investment made for a client, but advisers will now have to disclose them under a best-interest contract exemption. And they must be ready to defend them in a dispute with an investor.

Seeing the potential for class-action lawsuits, financial-advice firms have spent months poring over the 1,023-page document, and have finally begun announcing compliance plans.

Bank of America Merrill Lynch said in early October that it would stop charging commissions in IRAs to comply with the new regulation. Rival Morgan Stanley emphasized the preservation of choice, announcing Oct. 26 that it would continue to provide both brokerage-based and fee-based IRAs.

While the DOL rule is prompting broker-dealers to narrow their fund selection, Morgan Stanley said customers in its retirement brokerage accounts will continue to have access to a broad offering of investment products, including mutual funds and exchange traded funds.

The wealth-management industry is fragmented and nuanced, contributing to consumers’ confusion about the different types of advisers they can hire and what they may expect from them. Many don’t know that RIAs are fiduciaries required to act in their clients’ best interests at all times, while brokers are legally bound to a less-stringent suitability standard, except when it comes to retirement accounts captured under the Labor Department’s new rule.

Advisers adjusting to the shifting regulatory landscape, could see the SEC propose a uniform fiduciary standard that levels the playing field.

The federal watchdog has the authority under the Dodd-Frank financial reform law to issue such a rule, which would require all advisers to act in their clients’ best interest when providing any kind of financial advice.

Advisers who rely on sales commissions and resist transitioning to fee-based revenue streams are ignoring the future of the industry, according to Mr. Bloom, who sees the mentality shifting on the ground at Commonwealth.

The firm’s 1,650 independent advisers aren’t just getting the message from leadership at the top. He said they’re now hearing it from each other.

(This story updates an earlier version to reflect uncertainty surrounding the Labor Department’s fiduciary rule after Mr. Trump’s victory.)