Merrill Lynch Rethinks Prohibition on Commissioned Retirement Account Products

After being one of the first firms to eliminate use of commission-based products in individual retirement accounts, Merrill Lynch announced this week that it will again allow the practice.

This week, Bank of America Corporation announced it is “enhancing the way the [Merrill Lynch] firm delivers advice and solutions to investment clients by providing them with greater choice and flexibility to help them pursue their financial goals.”

According to a statement from Andy Sieg, head of Merrill Lynch Wealth Management, in response to client feedback and in the wake of the defeat of the Department of Labor (DOL) fiduciary rule, the firm is taking steps to reintroduce use of commission-based products for retirement planning clients. The goal, according to Sieg, is to “provide clients with greater choice and flexibility, while maintaining our support for a best interest standard for investment advice across all accounts.”

The first practical effect is that beginning October 1, 2018, Merrill Lynch’s restrictions on commission-based sales into retirement client accounts will be lifted. Also notable, the firm is moving to enhance the way it delivers advice to clients across all accounts. This will be achieved by evaluating supervisory routines for client brokerage activity and brokerage-versus-advisory program choice.

The new evaluations will consider factors such as client age, level of wealth, diversification of portfolios in proportion to total assets, the relative costs of investment alternatives, and how advisers are compensated for those recommendations. The firm also plans to expand the delivery of its “summary of programs and services,” which outlines services and associated fees to all brokerage clients.

The roots of this compensation shift go back to November 2016, when the firm formally implemented its response to the now-defunct Obama-era DOL fiduciary rule expansion. Merrill Lynch advisers who until that point operated as brokerage distributors (i.e., who collected their compensation via variable commissions based on sales) immediately began transitioning to the firm’s fee-based Investment Advisory Program (IAP), Merrill Edge Select Portfolios, the Merrill Edge self-directed channel and Merrill Edge Guided Investing.

Like its competition, Merrill Lynch today faces an increasingly murky regulatory outlook. At the same time that the Department of Labor fiduciary expansion effort fades, the Securities and Exchange Commission has taken the lead on strengthening advisory conflict of interest standards. Advice providers that moved early to get into compliance with the proposed DOL 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 Republican administration’s and Congress’ clear loathing of financial market regulation?

There is also the fact that individual states are moving to establish their own best interest regulations for the sale and service of investment products; attorneys warn that more piecemeal regulation is likely, as are lawsuits to test some complex ERISA preemption issues. Clearly, the current move from Merrill Lynch to strengthen brokerage sales oversight is meant to bring the firm into compliance with the SEC’s (and some states’) vision for a new best interest regime.