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Morgan Stanley Sticking With Commissions

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By Mack Bekeza

Morgan Stanley recently announced how it plans to comply with the impending Fiduciary Rule. As expected, Morgan Stanley did not follow the Merrill Lynch path. Instead, it plans to operate under a provision of the rule called “Best-Interest-Contract Exemption (“BICE”)”. In other words, Morgan Stanley’s strategy is to tackle the compliance requirements and have its clients sign additional disclosures.

Morgan Stanley has decided to take the BICE route because it believes that its “advisers can most effectively uphold a fiduciary standard of care and work in clients’ bests interests by continuing to offer choice.” Morgan Stanley further stated, “Delivering a retirement account platform based on fiduciary principles that provides the widest possible capabilities and preserves client choice is our vote of confidence in our advisers’ continuing commitment to placing client interests first.”

Essentially, Morgan Stanley believes that offering clients the choice between having a commission-based or fee-based retirement account is in the client’s best interest. This also assumes that Morgan Stanley advisers will not sell or recommend certain alternative investments that might not optimally meet a client’s liquidity and retirement needs.

In our opinion, Morgan Stanley may have chosen its business model to differentiate itself from Merrill Lynch. Many advisers only sell commission-based products and want to work for a large broker dealer. The rule points out that paying commissions may be in a client’s best interest (versus asset-based fees) if they have few transactions. However, the firm might still come under fire if its clients believe they are being misled. At the end of the day, it’s about putting the clients first.

If you would like to read further into the decision, check out Investment News’s post about Morgan Stanley’s decision.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@Castlerockinvesting.com

Major Move by Merrill Lynch to Comply with Fiduciary Rule

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By Mack Bekeza

In order to comply with the upcoming Fiduciary Rule, Merrill Lynch decided to discontinue offering commission based IRA accounts to investors starting April 10th of 2017. Specifically, they want to remove a major conflict of interest between them and their clients by only offering fee-based advisory, robo-advisory, and self-directed services for IRA accounts. Merrill Lynch’s decision is expected to have a major ripple effect for not only their clients, but for their advisers and their respective competitors.

So, how does Merrill Lynch’s decision affect their advisers and their competitors?

  1. As of April 10th of 2017, the firm’s 14,000 plus advisers will no longer be able to open new commission based IRA accounts, which is a notable source of their compensation. On top of that, advisors will now have to further prove their value to their clients when their primary form of compensation will be under a fee based model.
  2. Since Merrill Lynch is one the first major wirehouse firms to make this move, it is expected that other wirehouse firms will also follow suit in order to remain competitive in the upcoming Fiduciary focused marketplace.
  3. Merrill Lynch as well as other wirehouse firms will more than likely face other regulatory issues such as having fee-based variable compensation, which will be prohibited under the Fiduciary Rule.
  4. This might lead to certain broker dealers to no longer service IRA accounts due to additional costs of complying.

Although we believe this is an excellent move by Merrill Lynch, we believe that wirehouse firms such as Merrill will still face regulatory issues as they may have to forgo recommending certain investments to clients as well as having to develop a truly uniform method of compensation from their IRA accounts.

The People’s Best Interest…The Battle Continues

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The official ruling for “fiduciaries,” meaning people who are legally bound in the best interest of retirement investors, will not take effect until April of 2017. However, the Department of Labor (“The DOL”) has been bombarded by lawsuits. This brings us to the recent filing from the National Association for Fixed Annuities (“NAFA”) in June 2016 with regards to how the ruling is defining a “fiduciary,” along with other material in the ruling.

Before we get into what exactly NAFA is complaining about, let’s review how the DOL defines a “fiduciary, which is:

“Any person who exercises any discretionary authority or control respecting the management or disposition of its assets or has any discretionary authority or responsibility in the administration of the plan” as well as “any person who renders investment advice for a fee”. [1]

So, what exactly is NAFA complaining about? According to them, “Congress intended ERISA fiduciary duties to apply only to those who participate in ongoing management of a plan or its assets.” As we mentioned in the previous paragraph, this is not the case. NAFA completely disregarded that fiduciaries are those who render investment advice for a fee. Put it this way, an annuity can play a large role in someone’s retirement, so how would selling annuities to people not be considered rendering investment advice?

Another claim made by NAFA was in regards to how the DOL is allegedly “exceeding its authority by imposing ERISA fiduciary obligation on parties to transactions involving IRAs.” Again, NAFA has it wrong. Although investment advisors to IRAs are considered fiduciaries, those individuals are not subject to the same scrutiny that an ERISA fiduciary would be.

This case is an excellent example of how people who work in the commission-based side of the financial services industry are trying to keep their industry alive. They realize that (as of late April 2017) their ways will no longer work for them in the marketplace, so they are desperate to fight this. Keeping things how they are now can lead to many retirement investors losing billions of their hard earned dollars from commissions and expensive products.

Attached is a link to the article that we used as a reference. And, for those who want to see the DOL’s official response to NAFA, click here! However, just a warning, the official response is about 105 pages long.

[1] As a note, Castle Rock Investment Company falls under the DOL’s definition of a fiduciary for both ERISA plans and IRAs.