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More fiduciary fallout: Commonwealth to stop offering commission-based retirement accounts

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In what may be a historic first among IBDs, Commonwealth Financial Network will stop offering commission-based products in all retirement accounts next year, citing liability risks under the fiduciary rule.

"The thing everybody is concerned about is class and action," says Commonwealth CEO Wayne Bloom. "It's hard to come to any conclusion other than the future likelihood of liability" is high.

Commonwealth's decision follows a similar move by Merrill Lynch. The wirehouse, which has over 14,000 advisers, said earlier this month that it will cease offering commission-based retirement accounts among other changes as part of its plan to comply with the fiduciary rule.

The regulation, which goes into effect next April, allows brokerage firms to offer commission-based accounts under the so-called best interest contract exemption.

"We're doing everything we can so that the attrition will be nothing," Commonwealth CEO Wayne Bloom says. "Is that unrealistic? Perhaps."

But whether firms would use the exemption has been an open question. So far Edward Jones, a brokerage firm with more than 14,000 brokers, has been the rare outlier in saying it would use the exemption – albeit without offering clients ETFs and mutual funds in such accounts. The firm cited concerns about pricing and costs of such funds.

The decisions by Commonwealth and Merrill may be a bellwethers as firms navigate how best to comply with the new regulation.


Commonwealth's move is effective as of April 10, 2017, leaving time for clients to make 2016 tax-year contributions to their accounts on either a commission or a fee basis, the firm says.

Making the switch to fee-based retirement accounts could be less painful for Waltham, Massachusetts-based Commonwealth than other IBDs. Bloom says that the firm derives only 10% of revenues in its retirement accounts from commissions right now, while average production for its 1,650 advisers is about $600,000.

"We started our fee-based journey more than 20 years ago," he says. "We feel very fortunate that we have the financial strength to make this slight pivot."

Commonwealth is the fourth-largest firm on the FP50 list of the nation's largest IBDs.

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Four of the top ten firms on the FP50 reported that 50% or more of their revenues came from commissions. Inclusive of nonretirement business, Commonwealth's total revenues are 70% derived from fees, Bloom says.

Commonwealth's move is prescient and smart, says Timothy Welsh, a consultant with Nexus Strategy, who says other IBDs are frozen in denial about the DoL rule.

"They are still in the first stage of grief," Welsh says. "First there's denial, then anger, then bargaining, then acceptance. They haven't even got to anger yet."

Welsh stands by the prediction he made over the summer that the financial advisory industry will lose about 40% of its advisers thanks to the rule, given that so many brokers and firms are still predominantly reliant on the sale of commission-based products. Many will exit the industry rather than try to adapt, he says. And once commissions disappear in retirement accounts, non-qualified accounts are likely to follow suit, he thinks, given that their use will become legally indefensible.

"The DoL [rule] is so much bigger than anybody ever imagined," Welsh says.

When asked what he thought of Welsh's assessment of the rule's likely outsized impact, Bloom said "I think he's right."

Bloom says he's surprised that the industry hasn't yet seen more IBDs go out of business yet.

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As the reality of the rule's impact sinks in, some advisers will realize their firms have not prepared them to adapt to it and they will leave for other IBDs, Welsh says, adding that, as this trend accelerates, Commonwealth will look like a very attractive alternative.

However, before that happens, Welsh thinks even Commonwealth is likely to lose a substantial number of advisers due to its announcement this week.

"I'm positive they looked at their exposure on the liability side and did the math versus their expected loss of assets [from factors including adviser attrition], compared the two outcomes and said, 'You know what? Net-net, we are going to be more stable, more long-term players, if we do than if we do not do this," Welsh says.

Bloom acknowledged that Commonwealth does have advisers whose commission income exceeds 10% of their overall production, but he says his firm is working with many of them directly on making the transition to fee-based.

"We're doing everything we can so that the attrition will be nothing," Bloom says. "Is that unrealistic? Perhaps."


Also this week, Commonwealth dropped its minimum client account size from $25,000 to $1,000 to help advisers serve small account holders, Bloom says. These accounts will be served at a fee of 25 basis points, he adds.

"Losing the ability to service that small account was very problematic" under the DoL rule, Bloom says. Advisers "used to just buy an A share [for small clients] and call it a day. [The lower account size] helps solve that problem."

In March, a month before the Labor Department announced the new rule, LPL Financial, the country's largest independent broker-dealer with about 14,000 advisers, said it intends to cut prices on its centrally managed platforms and its model wealth portfolios next year. The cuts are expected to reduce costs to consumers by 30%, LPL said.

Yet although LPL announced the first major changes in response to the new rule, Commonwealth went even further.

"They are a rarity in the B-D world," Welsh says. Other IBDs "are probably going, 'Crap, they beat us to the punch.'"

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