Morgan Stanley Flaunts Decision to Retain Commission-based Retirement Accounts
Morgan Stanley Wealth Management said Wednesday that it will allow its 16,000 brokers to continue selling retirement account investments on a commission basis in spite of the risks to the model raised by the Department of Labor’s forthcoming conflict-of-interest rule.
The decision confirms Morgan Stanley Chief Executive James Gorman’s strong hints last week that the biggest retail brokerage firm would distinguish itself from archrival Merrill Lynch, which is restricting its brokers to selling only fee-based retirement accounts once the DOL rule becomes effective on April 10, 2017.
Without mentioning Merrill by name, Morgan Stanley used the distinction to send a message about the integrity of its brokers.
“We believe we have the best and most professional advisors in the industry,” Morgan Stanley Wealth Management coheads Shelley O’Connor and Andy Saperstein said in a prepared statement announcing the policy. “Delivering a retirement account platform based on fiduciary principles that provides the widest possible capabilities and preserves client choice is our vote of confidence in our advisors’ continuing commitment to placing client interests first.”
A Merrill Lynch spokeswoman did not respond to a request for comment.
Morgan Stanley’s decision may reflect the fact that Gorman made a bigger bet on wealth management than any large competitor when he bought Smith Barney from Citigroup beginning in 2009, long before the DOL rule was enacted. With wealth management generating more than 40% of the firm’s revenue, he does not have the same flexibility to impose account restrictions on brokers and, to some extent, customers, that Merrill Lynch has.
Merrill wealth management provided 17% of parent Bank of America’s revenue in the third quarter. The bank is promoting its no-frills Merrill Edge business and Edge’s new Guided Investing robo platform to customers who prefer commission accounts.
Morgan Stanley is not promoting a robo offering “at the moment,” a company spokeswoman said.
Shortly after the announcement went out, brokers advertising clients’ “freedom of choice.”
Morgan Stanley Restrictions
The DOL rule favors advisory retirement accounts that charge a fixed percentage of account assets over commission-based transactional accounts that can lead brokers to promote products that pay them the most rather than ones that are best for customers.
Morgan Stanley plans to utilize an exemption in the rule that permits commission sales if brokers sign contracts agreeing to put clients’ best interests first. Merrill executives have said that such contracts are unworkable and risky because of potential litigation from customers claiming contract violations.
The New York-based company said retail clients will continue to have a “broad product suite” available to them in transaction-based retirement accounts, “including mutual funds and exchange traded products such as ETFs.”
To be sure, however, it is putting restrictions on its open-choice policy. Some annuities and alternative investment products now available to retirement account investors will be at least temporarily off limits under the DOL rule, the Morgan Stanley spokeswoman said.
Product availability “will depend on pricing decisions made by the manufacturers,” she said.
Just as Merrill Lynch has said that advisors will have to qualify for internal certifications to offer retirement advice, Morgan Stanley will be offering a “great deal of training” to guide its brokers, the spokeswoman said.
As the deadline for the DOL rule quickly approaches, other firms are unveiling their plans. Ameriprise Financial said Wednesday that it will allow its 9,800 brokers to continue to sell commission-based retirement accounts.
“It does require more work on our part,” Ameriprise Chief Executive Jim Cracchiolo said on a conference call with analysts. “It does require more compliance. It does require more due diligence. It does require more disclosures and documentation for an advisor to do that fully.”
Ameriprise, however, is introducing new policies that limit recommendations to investors on rolling over their employer-sponsored 401(k) accounts to IRAs, an activity that the DOL rule has subjected to close scrutiny.
Commonwealth Financial, a large independent broker that competes with Ameriprise, said Monday that, like Merrill, it will eradicate commission-based retirement accounts in the interest of simplicity and of avoiding litigation.
LPL Financial, the biggest independent broker-dealer, has taken the Morgan Stanley route, promoting the “choice” it is giving clients at the same time that it is restricting brokers’ ability to sell commission-based variable annuities and other products with high commissions. Edward Jones has similarly said that its brokers can continue selling commission-based retirement accounts on the proviso that they do not sell mutual funds or exchange-traded funds in such accounts because of the variability of commissions paid by different fund sponsors.