Billions Gush Into Merrill's Fee Accounts as Obama-Era Rule Looms -- Update

By Michael Wursthorn Features Dow Jones Newswires

Billions of dollars in new fee-paying assets flowed into Bank of America Corp.'s coffers during the first quarter, a record high that comes as its Merrill Lynch unit continues its efforts to comply with now-delayed retirement rules.

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Nearly $30 billion of new fee-paying assets flowed into the Charlotte, N.C., bank's global wealth unit in the January-March period, as brokers push retirement savers who pay commissions for stocks and bonds toward a choice: move their accounts to a model that charges a fee based on a percentage of assets or to online brokerage platform Merrill Edge.

Higher revenue from asset-based fees helped push Merrill's revenue up 3% from last year to $3.8 billion, offsetting lower traditional commission revenue, the bank said. Of Bank of America's $2.59 trillion in total wealth assets, about $946.8 billion are in longer-term investment strategies, including those that charge a fee.

"These solid results were produced in a period of change for the industry as firms and clients anticipate new fiduciary standards and other market dynamics," finance chief Paul Donofrio said on a conference call Tuesday.

Bank of America has been talking with its commission-paying retirement savers since last fall in an effort to comply with the Labor Department's now-delayed fiduciary rule requiring brokers to put the interests of retirement savers ahead of their own. Even after the Labor Department said earlier this month that it would delay the rule's April 10 implementation by 60 days to conduct a review of its economic impact, Merrill executives told brokers to push forward.

The first-quarter inflows were a record high for the unit, beating the previous mark of $20.4 billion set in the first quarter of 2013. The bank said the inflows were driven by strong client activity and the movement of assets from individual retirement accounts that pay commissions into fee-based accounts.

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Meanwhile, online brokerage platform Merrill Edge saw a 21% jump in assets from the year-earlier period to $154 billion, the bank said. Mr. Donofrio credited the increase to more clients who wanted to direct their own investments. The bank launched Merrill Edge in 2010 to attract investors with less $250,000 in assets, and a robo-adviser service was recently added to the platform.

Even before the fiduciary rule, brokerages were pushing clients to fee-based accounts. Brokerage executives say clients better understand how much they pay for investment advice in fee-based accounts and benefit from a higher level of supervision. The move also helps brokerages' bottom lines; researcher Morningstar Inc. says fee-based accounts can yield as much as 50% more revenue than commission accounts.

Wells Fargo & Co., which has kept commissions as a payment option in retirement accounts, last week reported a 14% increase in fee-based assets to $490 billion in the first quarter. The San Francisco bank attributed the gains to rising markets and inflows of client cash and assets. While also reporting first-quarter earnings last week, J.P. Morgan Chase & Co. said $8 billion of new assets flowed into long-term products, including those that charge a recurring fee. Total client assets stood at $1.8 trillion as of March 31, up 10% from the year-earlier period, the New York bank said.

Wells Fargo previously said it would continue to allow its retirement-saving clients to pay commissions for trades, although some investment products wouldn't be available for purchase in such accounts. J.P. Morgan, meanwhile, said retirement savers who currently pay commissions would have to move into accounts that are charged a fee or continue to pay commissions through a self-directed account. Since the rule's delay, J.P. Morgan has pushed back its own timetable to align with the Labor Department's.

Morgan Stanley has also been making the push to work with more investors for a fee. The New York bank reports earnings on Wednesday.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

Merrill Lynch's push to capitalize on now-delayed efforts to comply with retirement rules are already paying off.

Clients of Bank of America Corp.'s global wealth unit, including Merrill Lynch, moved a record $29.2 billion into fee-based accounts during the first quarter as Merrill brokers continued to push retirement savers who pay commissions for stocks and bonds to make a choice: move their accounts to a model that charges a fee based on a percentage of assets or to online brokerage platform Merrill Edge.

Those fee-paying assets, as well as conversions from prior quarters, are already helping Merrill's bottom line. Merrill's revenue rose 3% from last year to $3.8 billion in the first quarter as more asset-based fees helped offset lower traditional commission revenue, the bank said. Of Bank of America's $2.6 trillion in total wealth assets, about $946.8 billion are in longer-term investment strategies, including those that charge a fee.

"These solid results were produced in a period of change for the industry as firms and clients anticipate new fiduciary standards," finance chief Paul Donofrio said on a conference call Tuesday.

For years, brokerages have been putting more emphasis on boosting their revenue from recurring fees charged to customers. That is because fee revenue tends to be more predictable and steady compared with commissions, which can be harder hit during periods of market volatility. Researcher Morningstar Inc. says fee-based accounts can yield as much as 50% more revenue than commission accounts.

The shift to fee-based accounts from commission accounts has picked up since the Labor Department's fiduciary rule requiring brokers to act in the best interests of retirement savers was unveiled last year. The rule sought to eliminate conflicts from advice that often come when commissions are charged.

Bank of America has been at the fore of the charge. It set a course that sought to mostly do away with commissions in retirement accounts in favor of recurring fees and has been heavily advertising its shift. Merrill, for its part, decided that clients who wanted retirement advice from one of its brokers would have to pay a fee to avoid the rule's more onerous requirements and heightened legal risk.

J.P. Morgan Chase & Co. said it would follow a path similar to Merrill and steer its commission-paying retirement savers to accounts that charge a fee or to a self-directed option. While also reporting first-quarter earnings results last week, J.P. Morgan Chase & Co. said $8 billion of new assets flowed into long-term products, including those that charge a recurring fee. Total client assets stood at $1.8 trillion as of March 31, up 10% from the year-earlier period, the New York bank said.

Even after the Labor Department said earlier this month that it would delay the rule's April 10 implementation by 60 days to conduct a review of its economic impact, Merrill executives told brokers to push forward. J.P. Morgan said it would continue with its plan but push back its deadlines for clients to convert to coincide with the rule's new timeline.

Rivals such as Morgan Stanley and Wells Fargo & Co. have said they would continue to allow retirement savers to pay commissions in retirement accounts, although they would likely face some sales restrictions. Still, those banks have continued to report gains in fee-based assets in recent years.

Bank of America's first-quarter fee-based inflows were a record high for the wealth unit, which includes Merrill and private bank U.S. Trust, beating the previous mark of $20.4 billion set in the first quarter of 2013. The bank said the inflows were driven by "strong" client activity and the movement of assets from individual retirement accounts that pay commissions into fee-based accounts.

Meanwhile, online brokerage platform Merrill Edge posted a 21% jump in assets from the year-earlier period to $154 billion, the bank said. Mr. Donofrio credited the increase to more clients who wanted to direct their own investments. The bank launched Merrill Edge in 2010 to attract investors with less than $250,000 in assets, and a robo-adviser service was recently added to the platform.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

April 18, 2017 14:40 ET (18:40 GMT)