UBS amends broker pay as part of fiduciary compliance plans

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With the fiduciary rule set to go into effect next week, UBS is tweaking the way it compensates brokers for advising on clients' retirement assets as part of its plans to comply with the regulation.

The move is intended to preserve clients' ability to choose how they want to pay for services while enabling the firm to avoid conflicts of interest that the regulation targets, executives say. UBS intends to maintain a commission-based offering using the rule's best interest contract exemption.

"Different firms are making different decisions," says Tom Naratil, President of UBS Wealth Management Americas. "We've made the choice that we feel is the most client centric and adviser focused."

The decision is also the latest among wealth management firms that have spent the past year strategizing on how to avoid alienating clients or advisers while still staying in regulator's good graces.

Starting on June 9, the fiduciary rule's applicability date, UBS advisers will be paid for advising on retirement assets using a formula that takes into account the FA's production based on retirement assets in 2016.

For instance, consider an adviser who generated $1 million in revenue last year from $50 million in retirement assets. If he oversees the same assets for the remainder of 2017, he would be paid the same amount regardless of what transactions the adviser recommends, according to UBS. If the adviser were to double the retirement assets under management to $100 million, however, he would double his compensation from the prior year. The client, meanwhile, would continue paying for services, whether it be commission or fee-based, the same way as before.

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"Whether you did a transaction or not, [the adviser] will get paid the same way. So the advice he is giving is not affected by the way he is getting paid," Naratil says, emphasizing that the traditional comp grid brokerages use isn't going away.

This strategy addresses the rule's primary concern regarding conflicts of interest, Naratil adds.

"If [the adviser] gets paid more if he recommends a transaction, how can you prove he wasn't conflicted? So this is our solution," he says.

The changes to adviser pay are only for 2017, and, executives emphasize, only apply to retirement assets. UBS will review them later this year with an eye toward whether they are working or even still necessary, given the Labor Department may amend its regulation.

"You need something that you could in theory turn off [if required]," says Tom Naratil, President of UBS Wealth Management Americas.


The wirehouse's decision, unveiled to brokers Thursday, comes after Secretary of Labor Alexander Acosta declined to further delay the regulation's applicability date beyond June 9.

Unlike some of its competitors, UBS had been relatively mum about how it would comply with the rule. It was an intentional strategy, according to Naratil, who noted that the department had indicated that it would issue additional regulatory guidance, some of which was released in recent months.

"As we looked at choices others made over the last year or so, we saw advisers were getting more upset about the removal of choice," Naratil says.

He adds that UBS advisers said they considered preserving client choice as a top priority.

Some rival brokerage firms, such as Raymond James and Morgan Stanley, have also said they would maintain commission-based offerings using the best interest contract exemption.

Merrill Lynch, on the other hand, was the most prominent firms to say it would cease offering commission-based retirement accounts. Last year, the bank said that clients seeking such an offering could instead opt to use its self-directed platform Merrill Edge or its forthcoming digital advice platform.

Some advisers, however, took issue with that decision and opted to leave Merrill Lynch for rival firms. For the first quarter, Merrill reported that its brokerage force shrank by 145 advisers from the prior period, dropping to 14,484. Last month, Merrill Lynch said it would relax its commission ban.


Naratil says the firm's decision also took into account the still somewhat uncertain nature of the fiduciary rule.

"You need something that you could in theory turn off [if required]," he says.

The Labor Department's review of the regulation, ordered by President Trump in February, is ongoing. Industry experts anticipate the department is likely to make few amendments to the rule.

"I think the BIC could be modified, but I don't think fiduciary is going away," says Denise Valentine, a senior analyst at research firm Aite Group.

She expects other firms may make adjustments to their fiduciary compliance plans as they get more feedback from clients and advisers as well as additional guidance from the Labor Department.

"It's not like someone is going to hold a gun to your head and say you can't change your mind," she says.

For his part, Naratil expects to have ongoing conversations with regulators, including the Labor Department. UBS supports a best interest standard across all aspects of the client relationship but under the SEC, according to Naratil.

He noted that Acosta, in announcing his decision not to delay the rule, said he would include the SEC as part of his ongoing review of the regulation.

"We were happy to see that and it’s the right direction to go," Naratil says.

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Fiduciary Rule Compensation Compliance Wirehouse advisors Wirehouses Tom Naratil UBS UBS Wealth Management