Merrill Imposes Fees On Retirement Accounts
Merrill Lynch will no longer give retirement savers the option of paying a commission for trades, a wholesale exit from the traditional Wall Street sales model in accounts that stand to be affected by new conflict-of-interest rules on retirement accounts.
The Bank of America Corp. brokerage unit told its more than 14,000 brokers on Thursday that after April 10, when the new rules take effect, investors who want a retirement account at Merrill will need to pay a fee based on a percentage of their assets, instead of having the option of being charged for each transaction made in their account.
The announced move, coming six months since the unveiling of the Obama administration's fiduciary rule requiring brokers to put the interests of retirement savers ahead of their own, is roiling firms across the investing world as they look to comply and even capitalize on the changes. The rule is expected to affect about $3 trillion of client assets in the U.S., according to researcher Morningstar Inc.
At heart is the elimination of incentives that might cause brokers to give conflicted advice. Clients in fee-based accounts are charged a level fee based on a percentage of their assets, minimizing potential conflicts tied to specific investment products, observers said.
"This requires that clients engage with the firm fully," said Alois Pirker, a research director at Boston consulting firm Aite Group. "If the client isn't willing to do that, they will need to look for different options."
Retirement savers at Merrill who use a commission-based account also have the option of leaving their accounts unchanged after April 10 but wouldn't be able to make any significant changes or receive advice after that deadline. Merrill, aware that the broad change in retirement savings will force some investors to pay more, will give brokers flexibility to discount fees for those investors.
The rule is expected to affect less than 10% of Merrill's $2 trillion in client assets, Bank of America Chief Financial Officer Paul Donofrio told analysts in April. Merrill investors in nonretirement accounts won't be affected by the changes.
Merrill is the first major brokerage to eliminate a commission-based account option for retirement investors who want to work with a broker. St. Louis-based brokerage Edward Jones and independent broker-dealer LPL Financial Holdings Inc. are the only other big brokerages to detail their postretirement-rule business plans, with both still offering some sort of commission-based option to retirement savers.
Merrill's approach to compliance could serve as a template for its biggest rivals, according to Mr. Pirker. That is because the big brokerages, including Merrill, have more high-net-worth clients who may already work with a broker through a fee-based account.
Merrill clients with individual retirement accounts that charge commissions will have to choose whether to roll that over to a fee-based account, which may be more costly for investors who trade little, or move their assets to Bank of America's online brokerage, Merrill Edge, according to representatives at the firm. The latter option would offer investors access to a self-directed brokerage account or a generally cheaper fee-based option, as well as a soon-to-launch roboadvisory product, known as Merrill Edge Guided Investing.
Fees and commissions may vary, but hypothetically, an investor with $1 million in a fee-based retirement account at Merrill would be charged about 1%, or $10,000, annually. If that same investor had money in a commission-based IRA, and completed 20 equity trades, he or she would pay at least $2,500 -- although that could fluctuate higher based on the size of the trades and other investing fees.
Unlike Edward Jones and LPL, Merrill isn't using what is known as a best-interest contract provision in the fiduciary rule to offer a commission-based account to retirement savers. That provision allows brokers to receive variable or commission-based compensation in some circumstances. People familiar with the matter said Merrill isn't using the contract because even though it was made more workable in the rule's final draft, the documentation requirements were still labor-intensive and presented a litigation risk.
Edward Jones will continue to offer a commission-based account option to retirement savers, but they won't be able to use it to invest in mutual funds and exchange-traded funds. The firm said the rule makes sales fees on some mutual funds, known as sales loads, and some funds' differing share-class prices problematic for accounts that charge investors for each transaction made.
LPL, meanwhile, plans to introduce a mutual-fund-only IRA that charges a commission in early 2017 with a menu of funds it chooses.
Merrill will use the best-interest contract, however, to advise clients on rollovers from commission-based accounts and 401(k) plans to a fee-based option. The contract would no longer be necessary once a client moves into a fee-based option, the Merrill spokeswoman said.
Terry Laughlin, head of Bank of America's global wealth unit, called the approach simpler for clients as the firm prefers to have its brokers offer advice to investors and create financial plans through fee-based accounts.
Brokerages also like fee-based revenue because it tends to be more predictable and steady compared with commissions, which can be harder hit during periods of market volatility. Morningstar said fee-based accounts can yield as much as 60% more revenue than those that charge commissions.
Brokers say the fees are justified because they have to provide a higher level of service by spending more time understanding a client's full financial situation.
"They are using the [rule] almost as an accelerator for the direction toward fees," Mr. Pirker said. "The industry is moving in the direction where you have high-end advisers doing holistic work for clients."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com