Merrill ends mutual fund sales in brokerage retirement accounts, citing fiduciary rule
Merrill Lynch told its advisers to stop selling mutual funds in retirement brokerage accounts such as IRAs, a move that attempts to spare the wirehouse from potential conflicts of interest ahead of the Department of Labor's fiduciary rule.
A memo sent Tuesday to the firm's roughly 14,500 advisers alerted them to the change. Mutual funds will still be available through Merrill Lynch Investment Advisory Program accounts and non-retirement brokerage accounts, Frank McDonnell, the firm's head of global mutual funds, said in the memo.
The potential for conflicts arises in how Merrill was compensated. Clients charged a commission for the purchase of a mutual fund in a retirement account, and later enrolled in the Investment Advisory Program, would be charged an additional fee on that same mutual fund. The rule starts to take effect on April 10, 2017.
"We are implementing this decision in advance of the DoL rule’s applicability date, to ensure as seamless and positive experience for our clients and advisers as possible," a spokeswoman for the firm said.
Merrill told its advisers that starting in November, production credits generated from the sale of mutual funds in brokerage retirement accounts would not be credited towards incentive compensation under the terms of the 2016 Merrill Lynch Financial Advisor Incentive Compensation Plan. The firm would be setting up system blocks for the transactions by early next week, according to the memo.
"Unfortunately, brokers aren't going to be happy, but it's a proactive measure so it's less messy in the future," said adviser coach and consultant Elizabeth McCourt of McCourt Leadership Group. McCourt and other industry watchers said Merrill clearly was looking to avoid problems and be able to say in retrospect that it made the right choices.
Merrill first sent ripple effects through the industry when, in early October, the firm announced it would stop offering commission-based retirement accounts to comply with the fiduciary rule. Commonwealth Financial Network also jettisoned the accounts.
"There are ways to potentially be cute with it. You could potentially cut out retirement business from the back-end bonuses," says an ex-Merrill Lynch executive who works in the independent space. "Cute doesn't usually work when it comes to regulators."
The early decision stops advisers from earning commissions on products that will also generate fees through the firm's Investment Advisory Program.
"We fully expect to offer a range of options to help our clients," CEO Paul Reilly said.
The decision is effective immediately and was made within hours of the Department of Labor issuing new regulatory guidance on the fiduciary rule's implications.
The wirehouse, which is embracing the new regulation, is the first to unveil its strategy in depth.
But wirehouse rival Morgan Stanley chose to go the opposite direction, keeping its commission-based retirement business and requiring that the firm's advisers rely on the best interest contract exemption within the fiduciary rule. Ameriprise and Raymond James also are keeping their commission-based retirement accounts.
Edward Jones is to still charge commissions on retirement accounts, but is expected to fall in line with Merrill and also drop mutual funds from such accounts.
Bill Willis, CEO of Willis Consulting, said he wouldn't be surprised if more firms start following Merrill's approach to the regulation.
"We're heading into a world where everyone will do retirement accounts on a fee-based basis," he said. "If you're charging a commission, there's always the possibility that someone can look at you and say that you were trying to benefit yourself."