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Straus Decries Merrill, Morgan Stanley Pay-to-Play

By Murray Coleman February 13, 2017

Pay-to-play schemes and other notable conflicts of interest are often cited by consumer advocacy groups as reasons to support heightened fiduciary standards in wealth management. Indeed, such concerns are at the center of ongoing debate regarding the Department of Labor’s efforts to impose its so-called DOL rule on advisors working with clients’ retirement accounts.

But the rule is now likely delayed. In fact, many in the industry believe that president Donald Trump will either scrap the controversial regulation or water it down into some unrecognizable form.

One of those who laments such changes to the original proposal is John Straus, chief executive of FallLine Securities, which provides services to independent advisors catering to ultra high net worth clients.

Before forming FallLine he headed the private wealth management division at Morgan Stanley as well as JPMorgan’s and UBS’s private bank units between 1987 and 2010.

On Friday, FA-IQ caught up with the busy executive to get his views on how recent events might reverberate through the industry in 2017 and beyond. Both Merrill Lynch and Morgan Stanley declined to comment for FA-IQ’s earlier report on the pay-to-play views of Straus.

John Straus

Q: How is pay-to-play still a big issue for advisors?

A: Pay-to-play, of course, is where firms will ask money managers to pay them to offer products on their platforms. Where it really impacts advisors is when they tell their clients they’re picking the best products for each individual situation. But in reality, too often what they’re doing is choosing the best among those made available to them at any given time. And they’re frequently available to advisors only because the product manufacturer has paid to put them on a firm’s platform.

Q: Which sort of wealth firms are still operating this way?

A: The large wirehouses all do it. The reason why their advisors should care is because their clients trust them. So if a firm has a conflicted position, the advisor is put in a compromised position in building a trusted relationship with their clients.

Q: Do pay-to-play issues center around just mutual funds?

A: Of course, the pay-to-play problem has been around in mutual funds for many years. But it’s expanding now to a lot of other different areas. In fact, Morgan Stanley is just starting to institute such a system for advisors using ETFs on their platform.

Q: How do so-called expense dollars play into creating more conflicts for advisors?

A: When a company decides to have a conference for their advisors, they’ll go out to money managers and offer speaking slots. For that opportunity, the speakers can pay as much as $100,000 at large private wealth management events. Most of the big firms like Merrill Lynch and Morgan Stanley do it.

Q: How does this create issues for advisors?

A: Firms justify it in part by claiming that such practices help them to defray their costs for putting on high-quality events. The issue this presents for advisors, though, is that they’re hearing information about a particular strategy from a company paying to promote its own products and strategies. It’s a less direct pay-to-play issue, but choosing speakers based at least in part on whether they’re willing to pay for such opportunities can limit advisors’ ability to find out about what really are the best solutions for their clients.

Q: Assuming the DOL rule lives on, do you see such a regulation helping to curb revenue sharing issues?

A: I would hope so, but look at what Merrill Lynch did. They’ve said they won’t allow commission-based products to be sold in their retirement accounts. Even more importantly, however, is that they’re not going to let mutual funds be sold in retirement accounts. I can only speculate that the reason why they’re not allowing mutual funds is because of all the pay-to-play conflicts Merrill already has in-place.

[Editor's note: As previously reported, Merrill Lynch says it does still offer mutual funds in retirement accounts, just not in advised brokerage IRAs. Merrill Lynch clients can still purchase mutual funds in retirement accounts held in the firm's Investment Advisory Program (the fee-based Merrill Lynch One platform) as well as in retirement accounts on the Merrill Edge self-directed platform.]

Q: So they’re not tackling the real issue?

A: I would’ve hoped that rather than eliminating a product which can be a terrific solution in tax-deferred retirement accounts, they would’ve decided to eliminate the conflicted relationships they’ve built up over the years. Instead, they’re simply getting rid of one type of product.

Q: If the DOL rule is scratched, what major changes do you see coming for advisors at major brokerages?

A: If it doesn’t survive, some of these firms who’ve said in the past they’ll comply with the DOL rule are likely to reassess how they’re running their businesses. Mutual funds are actually a very good solution in retirement accounts since IRAs can defer clients’ tax burdens. So I would think that Merrill Lynch, for one, will have to re-think their position and consider allowing advisors to use these sorts of investments in retirement accounts. Others could do much the same.

[Editor's note: As reported previously, Merrill Lynch has indicated that its strategy as pertains to the DOL rule was to eliminate brokerage IRAs. The stated reason the firm eliminated the sale of mutual funds was in its clients’ best interest, i.e. eliminating the potential for them to be charged twice for the same product.]