Merrill Lynch Rethinks Move Away From Brokerage IRAs

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 to reassess how to proceed.

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 White House.

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 compliance.

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.