Merrill Lynch's Commission Ban Reversal: Here's How Advisors See it Playing Out
Starting Oct. 1, Merrill Lynch will again let advisors charge commissions on trades made in client retirement accounts. The wirehouse is ditching its former ban, instituted two years ago in the wake of the Department of Labor's proposed fiduciary rule for advisors on tax-deferred retirement accounts. Since the rule was vacated earlier this year, Merrill Lynch re-evaluated its commissions policy.
After a 60-day review, Merrill Lynch announced in late August it would roll back its ban on commissions. In its statement announcing the reversal, Merrill Lynch emphasized the flexibility the decision would provide clients.
But one of Merrill Lynch’s 17,400 advisors, whose team manages more than $2 billion in assets, doesn't expect clients to engage in any immediate trading because of or after the lifting of the ban next month. The Indianapolis-based advisor spoke on the condition set by the wirehouse managers that he not be identified further.
“I have zero items on an action list,” he says about the ban lifting.
But the same advisor says there are a minority of fee-based clients on his roster who will appreciate having the option to trade some of their retirement assets on a commission basis in the future.
The majority of his clients have a fee-based advisory relationship with his team and generally don’t pay commissions on their trades. Some of his clients, though, during the time Merrill Lynch’s ban on commissions remained in effect, segregated a chunk of their retirement accounts’ assets, which they were not planning to trade — and notably, not included those as the basis for advisory fee calculations. Typically, those segregated assets — on which the clients were not paying advisory fees — were fixed income products or concentrated equity positions that the clients sought to hold for a variety of reasons, the Merrill Lynch advisor says.
Now, with Merrill Lynch lifting the commissions ban, if and when those clients want to trade those segregated retirement assets, the advisor will make a commission. But if the clients choose to engage in a large volume of trades with those segregated retirement assets, they will ultimately find it more cost-effective to move them to their fee-based accounts or to Merrill Edge accounts, under which no advisor compensation is paid and commission-free and flat-rate trades are possible, the advisor says.
“The firm is steadfast in its commitment to looking out for clients’ interests first,” the advisor says.
What difference will Merrill Lynch’s lifting of the ban make in the advisor’s own take-home pay?
“It’s not going to be negative or positive in my compensation,” he says.
He accepts and even welcomes the notion that Merrill Lynch’s management will be watchful of advisors engaging in a large volume of commission-based trades in client retirement accounts. The wirehouse’s management will likely recommend that if clients are trading those assets with any frequency, they move those assets to an advisory fee-based status so that the trading no longer generates commissions.
“The firm’s oversight is going to end up with the right thing for clients,” the advisor says. At the same time, he expects his Merrill Lynch managers will recommend clients move retirement assets that they are simply holding and not trading to commission-based status, he says.
One week after Merrill Lynch announced its reversal of its ban, the Commonwealth Financial Network, an independent broker-dealer also said its similarly proposed ban — which was never fully implemented — would now also disappear.
“In particular, with the smaller accounts, we were having trouble figuring out how they were going to be optimal relationships as fee-based,” says John Rooney, a managing principal for Commonwealth Financial Network. Rooney states succinctly his firm’s attitude about such accounts: “Let’s just a charge a 4% commission on a transaction and move on,” he says.
When the DOL fiduciary rule still appeared likely to be enforced, under its proposed terms, if Commonwealth Financial Network advisors had charged commissions on retirement account trades, a threat of class action lawsuits existed, Rooney says. Those lawsuits would have been based on allegations of Commonwealth Financial Network’s systemic conflicts of interest, Rooney says. Such litigation could have cost Commonwealth Financial Network hundreds of millions of dollars, he says. But, with the DOL rule out of the picture, that threat no longer exists, he says. Commonwealth Financial Network was only “going in the direction” of a ban on commissions when such a legal recourse for clients alleging conflicts of interest existed, Rooney says.
Rooney argues clients will gain flexibility without a commissions ban in place. “They have the option of commissions or an advisory fee,” Rooney says.
For their part, advisors at RIAs — who never charge commissions and rely on fee-only business models — argue that some clients may in certain circumstances benefit from commission-based trading in retirements accounts.
“We are a fee-only advisor. We have a strong belief that fee-only is in our clients’ best interest,” says Mark Whidby, the chief investment officer for Lee Financial in Dallas, which has more than $1 billion in assets under management.
Even though Lee Financial advisors are “big believers” in fee-only, Whidby concedes, “not every person is a good prospect for us.” The commissions on trades in retirement accounts “could make sense for certain individuals. But that’s a certain population,” Whidby says.
He’s willing to make an educated guess on why Merrill Lynch reversed its ban.
“Merrill Lynch’s about-face is very interesting. They got pressure from brokers and maybe some clients,” Whidby says.
Tom Sedoric of The Sedoric Group of Steward Partners in Portsmouth, N.H., similarly engages in “zero transactional business,” he says.
But Sedoric, who previously worked at Wells Fargo and A.G. Edwards, also holds the view that commissions may have their place in some advisor-client relationships.
But, he adds, “There is an inherent potential for a conflict.”