Products November 4, 2016

Merrill Lynch Accelerates Fiduciary Rule Response

The firm initially planned to halt commission-based brokerage sales to retirement accounts when the first DOL fiduciary rule deadlines arrive in 2017, but Merrill Lynch has decided to halt the practice immediately to head off any potential issues. 
Reported by

Merrill Lynch, known as one of the four big wirehouse broker/dealers in the U.S., has halted the sale of mutual fund products in commission-based individual retirement accounts (IRAs).

The general tenants of the plan had actually already been announced by the firm in early October, but this week additional news reports emerged that Merrill Lynch would move even faster than first indicated to adjust its sales practices to get ahead of regulatory changes being implemented by the Department of Labor (DOL).

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A firm spokesperson tells PLANADVISER that all decisions made regarding the DOL fiduciary rule reform “are grounded in our strategy to provide best interest, goals-based advice to our retirement clients while preserving client choice. They also reflect our goal of ensuring that our advisers and our firm are best positioned to comply with the rule.”

Advisers who until this week operated as brokerage distributors (i.e., who collected their compensation via variable commissions based on sales) will immediately begin transitioning to the firm’s Investment Advisory Program (IAP), Merrill Edge Select Portfolios, the Merrill Edge self-directed channel and Merrill Edge Guided Investing. Each of these offerings, among others, will be augmented on an ongoing basis to ensure choice for both clients and advisers, the firm says.

“Advisers are receiving in-depth training on the rule, which includes its impact on product-related changes as well as how to document recommendations,” the firm adds.

Many in the industry probably anticipated the move even before the initial October announcement that Merrill Lynch would halt such sales. With a strict new conflict of interest rule coming into effect, brokerage firms recognize that recommendations by their commission-based advisers to purchase mutual funds within brokerage retirement accounts could create a conflict of interest. In Merrill Lynch’s case, if such a client had already been charged a commission and then they later enrolled the Investment Advisory Program, for example, the client could be charged an additional fee on that same mutual fund that had been purchased prior to April 10, potentially resulting in a prohibited transaction. 

Other firms are making similar adjustments to address similar structural issues that will have to be resolved prior to the DOL implementation deadlines. In Merrill Lynch’s case, clients will continue to have the option of maintaining previously purchased mutual funds in retirement accounts, which will be designated as “legacy asset exemption” accounts. However, after April 10, 2017, clients will not be able to add to the mutual fund positions or make any new purchases or exchanges between funds, or within fund families. Then, if clients want to continue purchasing mutual funds after November 2016, they can transition retirement accounts into Merrill Lynch’s Investment Advisory Program, or to Merrill Edge (self-directed or Merrill Edge Select Portfolios) based on their needs and preferences.

Given the fiduciary rule requirements, brokerage firms will also not be able to make new dividend reinvestment instruction in mutual funds in IRAs after April 10, 2017. Advisers may choose to continue to receive compensation on trails for mutual fund positions in legacy asset exemption accounts on or after April 10, 2017. Important to note, in Merrill Lynch’s case as with other firms, self-directed accounts will remain open for mutual fund purchases, but advisers may not provide advice on purchases in such accounts. 

In Practice November 4, 2016

DC Advisers Are Among Many Focused on Client Trust

Retail banks, active investment managers, defined contribution plan advisers, recordkeepers—they’re all focused on building client trust as a crucial element of future sales success.  
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According to Cerulli Associates, trust is the foundation that will make the relationship between investors and their providers last for the long term.

This is the conclusion of a number of recent Cerulli publications, including the November 2016 issue of The Cerulli Edge – U.S. Edition. Notably, it’s not just defined contribution (DC) retirement plan advisers coming to a new appreciation of the importance of a high quality client experience—all types of financial services providers are doing this work.  

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“Besides their legal obligations, providers offering additional products and service solutions must truly be in the clients’ best interest in order for the long-term relationship to be successful,” Cerulli researchers argue. “We believe that those firms that seek to align their best interests with those of their clients will substantially increase their marketshare over time.”

According to Cerulli and others, the effort of building real client trust will not just be necessary to be a top-performing firm; it will be a basic element of survival for service providers hoping to operate in the investment atmosphere anticipated for the mid- and long-term future. Investors, especially those under age 40, are more likely to prefer a consolidated relationship than to maintain a variety of relationships, Cerulli explains. There will also be far more scrutiny about conflicts of interest and proving value for service. Thus firms that are successful in gaining client trust will clearly be in an advantageous position.

Scott Smith, director at Cerulli, says these emerging investors “are likely to need an expanding service set, but some elements of their relationship could be loss leaders from the near to medium term.”

“Banks, insurance agents, retirement recordkeepers, certified public accountants, and direct brokerage platforms all vie for the central role in investors’ financial lives,” Smith concludes. “Rather than trying to serve any particular product niche, providers across the industry seek more opportunities to serve as the hub of their clients’ entire financial existence.”

Further complicating the picture, Cerulli’s research predicts investors, even in this new environment, will for the most part either remain unaware of the vast majority of available products or services—or they may not believe that their current providers are truly qualified to serve them in additional areas.  

“Over the past decade, a number of financial services providers have attempted to enter the ‘comprehensive wealth management’ segment that previously addressed only distinct pieces of households’ financial needs,” Smith says. They have met greater and lesser amounts of success, but nonetheless Cerulli feels provider firms “must embrace the opportunity to expand their reach or risk losing their place in investors’ financial lives altogether.”

Information on obtaining Cerulli Associates Research is available here. 

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