Just as wirehouse Merrill Lynch has decided to reverse a previous ban on commission-based individual retirement accounts, outspoken consumer advocate Barbara Roper is urging investors to proactively seek fee-only advisors.
“Investors need to protect themselves by seeking out advisors who really do live up to the fiduciary standard, who really do avoid conflicts, who really do commit to putting the customers’ interest first,” says Roper, the Pueblo, Colo.-based director of investor protection at the Consumer Federation of America. “What I’m basically saying is go out and find a fee-only advisor because I don’t think there are any broker-dealers that meet that standard. The broker-dealers had a chance to fix their business model to make it one that was beneficial to investors. But they fought tooth and nail to avoid doing that.”
While Roper doesn’t object to Merrill Lynch re-offering a commission-based account as an option for retirement savers who want it, she believes they should be avoided.
“I just think that, until brokers are prepared to really rein in the conflicts, investors should steer clear,” Roper says. “And investors need to look closely at how high the fees are on those accounts because a high-cost fee account is not the alternative people should be looking for.”
Merrill Lynch declined to comment specifically on Roper’s views about commission-based accounts, but gave FA-IQ this prepared statement from Andy Sieg, New York-based head of Merrill Lynch Wealth Management, about the reversal of the ban on commission-based IRAs: “Since the founding of Merrill Lynch more than 100 years ago, we’ve been committed to putting the interests of our clients first.”
“The broker-dealers had a chance to fix their business model to make it one beneficial to investors. But they fought tooth and nail to avoid doing that.”
Consumer Federation of America
The reversal of the ban of commission-based IRAs was announced in an August 30 memo – seen by FA-IQ – from Sieg and distributed to the firm’s global wealth and investment management employees and partners.
Merrill Lynch’s complete turnaround is a direct result of the demise of the Department of Labor's fiduciary rule, which was the impetus for the decision to ban commission-based IRAs in October 2016.
Back in 2016, Merrill Lynch said it “wholeheartedly” supported the DOL rule and touted its decision to ban commission-based IRAs in print, digital and social media with the main tagline of: “We’re committed to your best interest. Not the status quo.”
At that time, Merrill Lynch said it believed maintaining commission-based IRAs would be too challenging and unsustainable given the compliance requirements of the DOL rule, which was killed in March when the U.S. Court of Appeals for the Fifth Circuit ordered the rule to be vacated in its entirety. That order was made official by the court in June.
Merrill Lynch’s systems are expected to be updated in time for a restart of brokerage capabilities in IRAs by Oct. 1, Sieg says in the memo – two years since the break from commissions-based IRAs.
Sieg says the demise of the DOL rule and the SEC’s proposed Regulation Best Interest allowed Merrill Lynch to reassess the ban, and the decision to reverse it is in response to client feedback.
“These two events led us to take a fresh look at our policies, taking into account feedback from clients and continued guidance from regulators,” Sieg says. “This in turn provided us with an opportunity to improve the client experience by preserving client choice, while maintaining our support for a Best Interest standard for investment advice across all accounts.”
Sieg says enhancements are being put in place as Merrill Lynch restarts brokerage capabilities in retirement accounts, including the way the firm delivers advice to clients across all accounts.
Merrill Lynch will be evaluating supervisory routines for client brokerage activity and brokerage versus investment advisory program choice.
“As we evaluate and implement these routines, we 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 advisors are compensated for those recommendations,” Sieg says.
Merrill Lynch also plans to expand the delivery of the Summary of Programs and Services, which outlines services and associated fees to all brokerage clients. This information will be provided during the account opening process and posted on the firm’s website.
Separately, Merrill Lynch will provide a plain-English disclosure, in summary form, with critical information about the brokerage relationship.
“We believe this will be consistent with the requirements of the SEC’s Best Interest standard proposal,” Sieg says.
Meanwhile, Ron Edde, San Diego, Calif.-based president and CEO of recruitment firm Millennium Career Advisors, believes Merrill Lynch’s decision to ban commission-based IRAs and then walk back that decision two years later is yet another demonstration that its brokers “are not the firm’s top priority when it comes to most major decisions.”
Convincing brokers to make the transition from commission-based to fee-based IRAs was a major challenge for Merrill Lynch, and Edde says many left the firm because they didn’t want to make the transition.
“The brokers were not happy then, and they are embarrassed now,” says Edde. “Imagine being compelled to sing the company song to their clients initially, and now having to go back and say, ‘You know what? That stuff we told you before was all BS.’”
Edde says the brokers “who are apparently frozen to their chairs are probably going to be happy” with Merrill Lynch’s reversal because it will let them again collect commissions on more of their accounts.
Those who left because they didn’t want to transition to commission-based IRAs “might be second-guessing themselves a bit, but the ones I’ve talked to aren’t sorry they left,” Edde says. “They were already tired of Bank of America’s constant meddling and of increasing competition from and attention to the bank-based Merrill Edge advisors.”
On April 6, 2016, the U.S. Department of Labor (DOL) passed regulations that impose rather strict rules on any advisor who works with clients’ retirement accounts.
We, at FCVA, are very happy to see the imposition of a higher standard of advice for clients’ retirement monies. We will be more pleased when the stricter regulations apply to all financial and investment advice.
For now, the new regulations apply to any advice offered for use in retirement accounts such as IRAs, 403(b)s, SEPs, SIMPLEs, defined contribution or defined benefit plans; any kind of IRS designated retirement account. The regulations require that the advisor use the “fiduciary standard” when considering and recommending any investment used in a retirement plan.
Information from the DOL regarding official definitions of “fiduciary” and “conflict of interest” may be found by following the links below:
Briefly, a fiduciary is one who regards the client’s best interest to be paramount. The compensation paid to the advisor cannot be considered by the advisor when deciding whether or not to recommend a particular investment. The only questions allowed by the advisor to him/herself include, “Is this investment in my client’s best interest? Will it provide what my client needs when they need it? Is it the most financially efficient way to accomplish the goal? Is there something I can offer that may be better for my client?”
At no time can the advisor consider that two investments may be equally suitable for a client but one pays the advisor more, so that is the one recommended. Such is the “suitability rule” that has long been imposed on registered representatives of broker/dealers. It allows the variability of the advisor’s compensation to enter into the decision of what to recommend to a client.
The new regulations from the DOL specifically now require that registered representatives and non-registered insurance agents discard “suitability” and adhere to the fiduciary standard when advising on retirement accounts.
Only retirement accounts.
FCVA is a registered investment advisor (RIA) and as such has been required to adhere to the fiduciary standard for many years in all of our clients’ accounts – not only retirement accounts. RIAs have long been allowed to advise on corporate accounts such as 401(k)s because RIAs are by definition, fiduciaries. Registered Representatives have never been allowed to advise on ERISA retirement plans because of the obvious conflicts of interest. This new DOL rule requires that all advisors who advise on any type of retirement account now adhere to the fiduciary rule.
At least the clients’ retirement accounts win.