The future of the Department of Labor (DOL) fiduciary rule
reforms adopted under former President Barack Obama is now in doubt under the leadership of the Republican-controlled Congress and
Amid the effort to roll back the fiduciary reforms, retirement
advice providers that moved early to get into compliance with the proposed
conflict of interest standards are left wondering how to proceed. Should they
continue to move toward flat-fee based business to meet the organic client
demand for such arrangements that will continue to exist despite the regulatory
picture? Or is the whole project becoming unnecessary given the well-established
use of commissions in today’s marketplace and the new administration’s apparent loathing
of financial market regulation?
Among the many firms contemplating this difficult picture is
Merrill Lynch, which earned trade press headlines again this week for the way
it is reforming its individual retirement account (IRA) business. The firm has been an early mover
as the fiduciary
landscape has shifted and changed, first under President Obama and now
under President Donald Trump. It was way back in October 2016 that Merrill Lynch
became one of the first major firms to announce it would respond to the tougher
fiduciary standard by no longer selling advised, commission-based
individual retirement accounts (IRAs), starting in 2017. Then again in
November 2016 the firm made another announcement to the effect that it would
halt the practice immediately to head off any potential issues with future
The announcement represented a major shift for many of the
firm’s 14,000 advisers. At the time, the firm indicated that clients who
traditionally would have been served by the commissions-based IRA brokerage
platform would instead be directed toward other segments of the Merrill Lynch
business including primarily the Merrill Lynch One platform offering a single,
asset-based fee schedule, as well as the firm's Investment Advisory Program. Self-directed and guided investing would be permitted
through the Merrill Edge platform, as well, providing clients with additional
flexibility and choice.
New details emerging from the firm suggest it is now delaying
some of its planned reform strategies and entering, more or less, a wait-and-see mode. Moreover, firm leadership may feel a need to remain flexible and adaptive in such a rapidly
evolving and unclear environment. For example, it now seems the firm will delay work to
implement “fee leveling” for advisers and clients using the Investment Advisory Program, a task that was expected
to be quite challenging not just for Merrill Lynch but for all providers with similar offerings.
Important to note, the firm is apparently not backing away from the recently established restrictions of sales of certain products including mutual funds, within commission-based IRAs—so it seems the fundamental approach remains the same for Merrill Lynch moving forward. The firm also will continue to work with third-party asset managers to significantly improve and automate the process around sales charge waivers to ensure that clients are receiving all appropriate savings privileges, whatever platform they use. One component of this sales charge waiver policy will be to enable an automatic non-taxable exchange of C shares to load-waived A Shares for some clients.
All indications are that the firm will seek to be flexible
when it comes to structuring its investment platforms and charging fees to
clients, but leadership is signaling that it believes fiduciary service will be a primary component of its long-term future. Even if the rule is eliminated, and some form of brokerage IRA
accounts remain, leadership anticipates the primary vehicle for managing
retirement assets will still be Merrill Lynch One. This is the platform that at
present most closely meets the requirements of fiduciary care under the
Employee Retirement Income Security Act (ERISA).
The firm further tells PLANADVISER that it will, unsurprisingly, have more announcements to make about its business model in the near future. There are still questions to be answered about how to effectively move people and products onto flat-fee based platforms, and the firm says it is eager to work on finding new and innovative solutions.