Merrill Lynch Signals More Flexibility in Fiduciary Rule Response

It was back in October 2016 that Merrill Lynch, known as one of the four big wirehouse broker/dealers in the U.S., would no longer sell products to customers through advised, commission-based individual retirement accounts (IRAs) starting in early 2017.

The firm was one of the first nationally known providers to broadcast its plans for responding to tougher conflict of interest restrictions approved by the Obama administration but left to be implemented by his successor, and it actually moved a few months later to accelerate its response and immediately cut mutual fund-commissioned IRA sales.

Keeping with the trend, Merrill Lynch was also one of the first firms to publicly pivot on the fiduciary rule after the election of Donald Trump as President and the Republican sweep of Congress. At that point, details emerging from the firm suggested it would delay some of its planned reform strategies and enter, more or less, a wait-and-see mode, given the new president’s outspoken criticism of new financial regulations. Firm leadership told PLANADVISER they felt a need to remain “flexible and adaptive in such a rapidly evolving and as-yet-unclear environment.” One extension of this was that the firm delayed 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 sales structures and product offerings.

Important to note, at that time the firm was not expressly backing away from its plans to enact restrictions of sales of certain products, most notably mutual funds, within commission-based IRAs—so it seemed that fundamentally the new approach remained the same for Merrill Lynch moving forward. The firm also said it would 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 would be to enable an automatic non-taxable exchange of C shares to load-waived A Shares for some clients. 

Outlining its current position, the firm tells PLANADVISER it is “operating under the assumption that the applicability date of the Department of Labor’s fiduciary rule will be June 9.” And as the firm told its own advisory force in a memorandum from Andy Sieg, head of wealth management, “foremost in our mind is the need to ensure you have the resources and support necessary to provide investment advice in our clients’ best interests with respect to their retirement accounts … Our primary vehicle for delivering ongoing advice and service for our clients’ retirement accounts will be the Investment Advisory Program (IAP).”

However the firm says it has also “analyzed the limited situations where recommending a fee-based arrangement might not be in a client’s best interest and have considered alternatives to IAP for these situations.”

The firm declined to go into further detail at this juncture, but it stands to reason that it will be adding products to the Investment Advisory Platform (IAP) to improve the adviser and client experience—for example, advisory share class annuities within IAP. There is also the chance that the program will be evolved to offer hedge funds, new-issue certificates of deposit, and other market-linked investments within IAP.

There is further speculation among those following Merrill Lynch’s progress in this area that it could very likely continue to offer “limited-purpose brokerage IRAs.” In addition to IAP, these account would initially be for cash and bank deposits only, but could to expand to include a somewhat wider product set, such as money funds, brokered CDs and concentrated stock positions—such as employer rollovers or transfers.

Depending on what occurs with the actual fiduciary rule implantation, this type of business would most likely require use of the best-interest contract exemption (BICE). Naturally, any brokerage options to which the BICE applies will carry some additional requirements and responsibilities for advisers, to ensure that they can demonstrate compliance with Employee Retirement Income Security Act (ERISA) requirements and show that they have acted in the client’s best interest.

It is likely that more information will emerge from Merrill Lynch and other providers once more clarity comes out of the White House and Congress regarding the real long-term future of the fiduciary rule. Right now the rulemaking has only been delayed and remains fundamentally intact, despite pledges from the President and Congress to fully overturn the Obama-era rulemaking.