Merrill Lynch is taking steps to reform compensation practices and trim product offerings to comply with a higher investment advice standard for brokers set to go into force this summer — moves that one advocate said don’t go far enough to protect investors.
The brokerage will level the pay its advisers receive for the sales of mutual funds in the same category and remove a small number of high-fee funds from its platform, according to published reports.
A Merrill spokesman confirmed the firm’s actions. They come in advance of the June 30 implementation date of Regulation Best Interest, which the Securities and Exchange Commission approved last summer. Reg BI, as it’s known, is designed to raise the broker advice requirement above the current suitability standard.
Merrill is among the first major firms to telegraph how it will comply with Reg BI. One investor advocate was lukewarm toward its efforts.
Knut Rostad, president of the Institute for the Fiduciary Standard, said a more substantial move would be to eliminate or avoid conflicts of interest.
“These are small steps at the margin that are positive, however larger steps at the center seem to be lacking,” said Rostad, who recently wrote a paper criticizing Reg BI for not adequately addressing conflicts of interest.
Merrill also said it will convert mutual fund C-shares to A-shares in brokerage accounts if the C-shares have been held for more than five years. Currently, Merrill makes that conversion when the C-shares have been held for 10 years. C-shares charge annual fees, while A-shares charge a front-end load and are generally less expensive if held for a longer time.
It also will sell structured notes only to accredited investors who meet certain income and wealth thresholds.
“We have long supported the efforts by the SEC to improve the standard of care for personalized investment advice, which align with our belief that clients should receive recommendations that are in their best interest,” the firm said in a statement. “The changes we’re making are focused on preserving client choice and access to brokerage, further mitigating or eliminating the potential for conflicts of interest in the brokerage space, enhancing client experiences and transparency, and continuing to demonstrate our commitment to putting their interests first.”
But the firm’s promise to remove some funds from its platform that have sharply higher fees than similar funds is an example of pulling up short, according to Rostad.
“To get rid of [a small] percentage of the most expensive funds is strictly defensive and unserious,” Rostad said. “It’s just an attempt to keep regulators off your back.”
Despite the COVID-19 pandemic, the SEC recently decided to maintain the Reg BI implementation date.
“Today’s actions send a clear message that even the biggest financial institutions are not above the law,” said Treasury Secretary Scott Bessent.
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