DOL Firm by Firm: LPL to Keep Ban on “Direct” Fund Investing
Despite the near-certainty that President Trump’s Friday memorandum on the Department of Labor’s fiduciary rule will delay the rule’s implementation date, LPL Financial is sticking with its plan to prohibit brokers from buying mutual fund shares for customers directly from fund companies.
Hours after the president instructed the acting DOL Secretary to review the landmark conflict-of-interest rule scheduled to take effect on April 10, the giant broker-dealer told its 14,185 independent salespeople they will have to abide by previously announced restrictions on the direct mutual fund business established to accompany the rule.
“[W]hether under a fiduciary rule or not, we all agree that we need to evolve the controls in place for our businesses,” LPL, which has been subject to heavy regulatory fines for sales violations in recent years, wrote in an unsigned FAQ memo sent Friday evening.
“We need to continue to enhance our controls to confirm we have necessary paperwork completed up front, have the ability to review transactions in real time, and to ensure client data is protected by our internal, secure platform.”
The decision, which the memo describes as a “difficult but important change,” is another indication of ways brokerage firms large and small have been leveraging the new rule to achieve policy goals that enhance their bottom lines regardless of broker resistance.
They have used the rule’s restriction on sales of commission-based products, for example, to steer brokers and customers to more revenue-stable fee accounts and have embraced guidance from the DOL on abolishing signing bonuses tied to future sales targets when recruiting brokers.
In its memo to brokers, LPL said it has little to fear competitively by limiting their ability to buy fund shares directly because it believes only a “few small broker/dealers” permit the direct mutual fund business and do so at the expense of controls that protect advisors and their clients.
A broker in New England affiliated with LPL said the change is significant because many brokers buy funds outside of the firm in order to reduce service charges and other fees for their clients.
To address those issues, LPL has created a new service that does not impose maintenance fees, standardizes commissions on all funds at 3.25% upfront and permits collection of 12b-1 sales fees from funds for as long as shares are held.
In a separate memo on Friday, LPL’s managing director of advisor relationships said the firm is closely watching the evolution of the fiduciary rule and may revisit other policy changes it has announced on products and compensation. LPL last year implemented a low-cost single share class plan for a popular managed account program and as of January 1, 2017, imposed limits on annuity commissions to conform with the fiduciary rule’s uniform pricing mandate. The memo from Andy Kalbaugh did not specifically discuss those policies.
Friday’s presidential order has been widely viewed as a tactic to delay implementation of the fiduciary rule, which the brokerage and annuities/insurance industries have largely opposed because, in part, it makes it more difficult for brokers to recommend that clients move retirement accounts from company 401(k) plans to brokerage-sponsored individual retirement accounts.
The president’s order was issued so close to the April implementation date, however, that many firm executives believe it would be destabilizing to roll back policies already promoted to brokers and their clients as being in their best interests.
“[I]t is unlikely that the fiduciary rule will become applicable in April 2017 as originally scheduled,” lawyers at Davis Polk & Wardwell wrote in a weekend memo to its brokerage and insurance industry clients. “Financial institutions, many of which have been undertaking massive overhauls in their business models relating to retirement investors to comply with the rule by its applicability date, will not truly have any certainty until the rule is officially delayed or rescinded.”
Kalbaugh’s memo on Friday hinted at the difficulty firms face in deciding whether to change their fiduciary rule plans.
“Moving forward, LPL will use this added time to thoughtfully evaluate which policy changes will be most appropriate, and the best timing for those changes,” he wrote.
Merrill Lynch, which boldly planted its flag last year by saying it will prohibit brokers from selling commission-based retirement accounts once the rule takes effect, is now hinting it may bend the hard line.
“We look forward to working with the White House, DOL and other agencies especially in regard to ensuring appropriate flexibility in how we serve our clients under a best interest standard,” Merrill’s new wealth chief, Andy Sieg wrote late Friday in an internal memo that a Merrill broker read to k-tcc.
Acting Secretary of Labor Ed Hugler said Friday that the Department is reviewing its legal options on delaying the applicability date. He could issue an interim final rule mandating a delay if the DOL can find that it has “good cause” under the Administrative Procedure Act to issue a rule without advanced notice and comment, the Davis Polk lawyers wrote.
“As a practical matter,” they concluded, the “Presidential memorandum confirms that the new administration views the fiduciary rule in its current form unfavorably, and signals that withdrawing or replacing the rule will be a priority of the DOL under its new leadership.”
The Senate has delayed confirmation hearings for Andrew Puzder, Trump’s choice as Secretary of Labor, four times with no new date set. The fast-food executive has not submitted any background paperwork to the panel conducting his confirmation sessions, and has a controversial record in the private sector of opposing minimum-wage price hikes and other policies that most Democrats support.
Independent of any action by the DOL, Congress could pass legislation to repeal the fiduciary rule, a time-consuming and politically volatile process. The implementation date could be quickly halted this week when a federal judge in Dallas rules on motions brought by the U.S. Chamber of Commerce and financial industry trade groups.
—Jed Horowitz contributed to this story.