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Merrill Lynch to Kill Commission-Based IRAs

October 7, 2016

When the Department of Labor’s fiduciary rule goes into effect April 10, retirement investors will no longer be able to open commission-based accounts at Merrill Lynch, the Wall Street Journal reports.

The company told its more than 14,000 financial advisors that investors opening retirement accounts will only be able to open a fee-based account, according to the Journal. Retirement investors who currently have commission-based accounts at Merrill Lynch can keep them after April 10 but will no longer be able to get advice or “make any significant changes” after the date, the paper writes.

A spokesman for Merrill Lynch says if clients choose to use the firm's robo — Merrill Edge Guided Investing, which was announced earlier this week — they will be charged an annual fee (0.45%) rather than pay a commission.

The thinking behind the move is that putting clients into accounts that charge a fee as a percentage of their assets will minimize Merrill Lynch brokers’ potential conflicts of interest in recommending specific products, the Journal writes.

The DOL’s fiduciary rule requires retirement brokers to put clients’ interests ahead of their own.

The move could be financially beneficial to the Merrill Lynch, as fee-based accounts bring in up to 60% more revenue than commission-based ones, according to Morningstar data cited by the paper.

The wirehouse says it won’t use the so-called best interest contract exemption for IRA accounts, but will use the exemption for advice on IRA rollovers, FundFire writes.

While the fiduciary rule forces advisors to act in the best interests of their clients and seems to favor fee-based advice over commissions, the BICE provision lets advisors collect commission on many products upon signing a best interest exemption agreement with clients.

Customers who wish to retain a commission-based IRA with the firm must move to Merrill Edge — Bank of America’s self-directed brokerage.

Merrill Lynch is the first among large brokerages to do away with commission-based options for retirement account investors seeking advisors, according to the Journal. Edward Jones and LPL Financial have announced planned changes following the rollout of the rule, but both still intend to allow commission-based retirement accounts with limited options, according to the paper.

(Getty)

Merrill’s move could spur other brokerages to follow suit, Alois Pirker, a research director at the consulting firm Aite Group, tells the Journal.

The rule is expected to impact about $3 trillion in client assets in the U.S., according to Morningstar data cited by the Journal. At Merrill Lynch, about 10% of its $2 trillion in client assets are expected to be affected, Paul Donofrio, chief financial officers at Bank of America, Merrill Lynch’s parent company, told analysts this spring, the paper writes.

By Alex Padalka
  • To read the FundFire article cited in this story, click here.
  • To read the Wall Street Journal article cited in this story, click here.