LPL Caps Non-Traded REIT Pay Ahead of DOL Rule, Delays Off-Platform Fund Ban
Taking advantage of the Department of Labor’s announcement that until at least January, LPL Financial is offering its 14,400 brokers a reprieve on its plan to prohibit them from buying mutual funds for customers directly from fund companies.
The ban irritated many brokers who argued that buying direct is less expensive at times than transacting all business over LPL’s platform. The largest independent broker-dealer said in a new notice to brokers that it will institute its “direct business” policy on January 1, 2018, when the phased implementation of the fiduciary rule that begins this Friday becomes fully effective.
In another new development stemming from the rule’s effort to curb product-specific sales incentives and standardize compensation within product categories, the biggest independent broker-dealer said it will impose commission limits on sales of nontraded real estate investment trusts (REITs), business development companies (BDCs) and real estate limited partnerships (RELPs) as of August 31, 2017.
The high-commission products, which have typically paid brokers 8% or more, are sold primarily through independent broker-dealer firms. Under LPL’s new policy, brokers will be limited to a maximum upfront commission of 3% and an annual trail of 1%, according to the “product, platform and compensation changes” reviewed by k-tcc. Once total commissions on a transaction reach 6%, they will end.
In a Q&A-style update on the new policies, LPL sought to reassure brokers that it would not thrive at their expense with the changes. “If my compensation is being reduced, is the difference going to the REIT/BDD company or someone else,” one question reads. The answer: “LPL is working with sponsors to lower the fees/expenses to the investor. LPL is not retaining the difference.”
Sponsors of the illiquid products who will meet the new compensation requirements will be tossed off the LPL platform, the product, platform and compensation notice said.
LPL’s new policy on banning outside purchases of mutual funds, on the other hand, will help the company’s bottom line as well as its DOL compliance agenda. Customers have around $50 billion of their assets in funds purchased outside of the company. Moving them in-house should increase LPL’s return on its $530 billion of customer assets from “just under 20 [basis points] to just over 20,” the firm’s chief financial officer Matt Audette told analysts in an April earnings call.
In other new policy changes taking effect this Friday, LPL is banning sales of no-load mutual funds in commission accounts, suspending sale of 12 fixed-annuity products (including nine from Jackson National) and eliminating of commissions for precious metal trades.
The changes reflect the far-reaching tentacles of the DOL Rule on compensation, even as the Trump Administration reconsiders the fiduciary rule.
“With the amount of speculation about the future of the rule given the regulatory and political environment, we believe many companies have slowed or even discontinued their work. Others are no longer offering brokerage in retirement accounts altogether,” LPL wrote in the Q&A that was sent on June 1 to its brokers. “[W]e’ve remained steadfast and focused on preparing behind-the-scenes so we could pivot and position you to serve investors and continue to grow in this dynamic environment.”
LPL in its new alerts also reminded brokers that it plans to introduce a mutual fund-only platform that will carry products representing 80% of its most used funds around January 1, 2018. The platform is aimed in part as “a solution for mutual fund business currently done off-platform,” the company said.
The extra seven months of direct fund purchases that LPL is allowing “provides you with more time to prepare for this change while we diligently build this innovative platform,” it said.
In another attempt to assuage brokers that also reflects the ongoing tensions the DOL rule has created among firms and product providers, LPL’s Q&A said existing direct accounts will not have to be moved to the new platform on January 1 and that some may be grandfathered and remain direct “in certain cases.”
The decision to banish no-load mutual funds, which some brokers say are better deals for customers than other fund classes, reflects some of the complications of the DOL fiduciary guidance. “Under the DOL rule, it is difficult to offer similar products side-by-side on a brokerage platform at widely varying compensation levels,” the firm wrote.
The decision to eliminate commissions on precious metals, which currently can be as high as 3% of the investment principal along with a $30 to $35 ticket charge to the broker, reflects the fact that the compensation for the trades are not standardized. All commissions and ticket charges for the commodities are being eliminated and replaced with a new $50 client ticket charge, in addition to the annual precious metals storage fee, according to the update.
Other firms also have been ironing out fiduciary rule policies on the eve of its phased installation.
Wells Fargo Advisors said in a May 24 memo that it will eliminate A shares and C shares in retirement accounts. UBS Financial Services told its brokers that it is changing its retirement account compensation to eliminate differential compensation by basing payouts on 2016 production.