Bank of America Corp.'s chief financial officer Paul Donofrio on Monday dismissed the notion brokers working for its Merrill Lynch brokerage unit will defect en masse because of the firm's decision to stop paying commissions on individual retirement accounts.
The bank announced earlier this month that it won't use the rule's best-interest contract exemption, and that beginning in April, it will stop providing new brokerage-based IRAs in order to comply with the Labor Department's fiduciary rule. The decision will benefit clients and advisers, Mr. Donofrio said during its
third-quarter earnings call Monday with analysts.
“The best-interest exemption is going to create confusion,” he said. “It's got operational pain for clients. It's going to be inefficient and cumbersome for advisers.”
The wealth management industry is closely watching how firms will implement the Labor Department's regulation, which requires financial advisers to act in the best interests of their clients when making recommendation for their retirement accounts. While the rule doesn't prohibit charging sales commissions, advisers must disclose any potential conflict of interests under a best-interest contract exemption.
In anticipation of the rule, Bank of America Merrill Lynch, the firm's full-service brokerage business, is organizing itself to provide goals-based advice, reflecting a broad industry trend toward fee-based revenue for wealth-management services and away from charging clients commissions for each investment transaction.
“For most Merrill Lynch clients, the best way for us to deliver retirement-related investment advice that meets the fiduciary standard is through our investment advisory program,” Matthew Card, a spokesman for Bank of America, said in an email. “We will provide pricing flexibility to help clients transition from brokerage retirement accounts to our fee-based platform.”
Clients who prefer not to receive advice from a Merrill Lynch adviser may invest through its Merrill Edge self-directed brokerage platform, he said. Beginning next year, they may also seek advice through the firm's new, Merrill Edge Guided Investing offering, which provides some professional
portfolio management.
The number of advisers at Merrill Lynch, which represents the bulk of the bank's wealth management business, increased during the third quarter by 80 from the same period a year ago to a total 14,552, according to the Bank of America spokesman. Today, 61% Merrill advisers have 50% or more of their client assets under a fee-based relationship, he said.
With many brokerage firms weighing whether to use the best-interest contract exemption available to advisers under the DOL rule, an analyst during the earnings call raised the idea that some brokers may prefer to work for rivals that choose to allow that option.
“We're implementing a strategy that creates significant flexibility for our advisers, and we're delivering fiduciary, best-interest advice to clients,” Mr. Donofrio said. “This is better for our advisers and it's better for our clients.”
Mr. Donofrio had signaled in an earnings call earlier this year that
the bank's significant investment in its fee-based advisory platform, Merrill Lynch One, would work well under the DOL rule. He expects the regulation, which takes effect in April, will impact less than 10% of the firm's assets.
Bank of America's global wealth and investment management unit reported $2.5 trillion of client assets in its third quarter results, up 4% from the same period a year ago on higher market valuation levels, according to Mr. Card. Most of the assets are tied to Merrill Lynch, which saw assets rise 7.5% year-over-year to almost $2.1 trillion.
Revenue at the global wealth and investment management unit declined 1.6% from the same period a year ago, to $4.4 billion, as transactional income at Merrill Lynch fell amid the shift away from brokerage-based relationships. Still, profitability rose as expenses dropped. The unit produced $697 million of net income, up 10% from the third quarter last year.
The decline in revenue from a year ago was partly offset by higher net interest income from loan and deposit balances, according to Mr. Card.
Bank of America's global wealth and investment management business saw record average loan balances of $143.2 billion in the third quarter, up $8.9 billion, or 6.6%, from the same time last year in the 26th straight quarter of loan balance growth, according to Mr. Card. The borrowing includes consumer real estate and securities-based lending, the bank's presentation of its third-quarter earnings results shows.
