Merrill Slams Door on Mutual Funds in Commission IRAs
The head of Merrill Lynch’s mutual fund business told the firm’s 14,500 brokers on Tuesday that they must immediately stop selling mutual funds for brokerage-based retirement accounts.
To drive the point home, the Bank of America-owned brokerage giant said in a firm-wide memo to Merrill brokers that they will not be given any revenue credit on the firm’s compensation grid for such sales.
“As of November 1, any PCs [production credits] generated from mutual fund purchases in brokerage retirement accounts will not be credited towards the calculation of incentive compensation under the terms of the 2016 Merrill Lynch Financial Advisor Incentive Compensation Plan,” Frank McDonnell, head of global mutual funds, wrote in the memo.
Merrill sent shockwaves through the brokerage industry three weeks ago when it said it would prohibit commission-based retirement accounts once the Department of Labor’s fiduciary rule
takes effect on April 10, despite an exemption in the rule that some rivals plan to use.
Tuesday’s decision to immediately close the gate on mutual fund sales in those accounts took brokers by surprise, and underscored the far-reaching effects of the DOL’s conflict-of-interest rule and securities industry lawyers’ ongoing attempts to interpret it.
“System blocks” preventing entry of fund orders in transactional retirement accounts are not yet in place but will be ready by next Monday, McDonnell wrote, indicating how quickly the decision was made.
“We are implementing this decision in advance of the DOL rule’s applicability date, to ensure as seamless and positive experience for our clients and advisors as possible,” a Merrill spokeswoman wrote in an e-mailed statement.
Merrill wants to eliminate the potential for compensation conflicts that could arise if a customer pays a commission for a purchase between now and April 10, and then has to pay additional fees to move into an advisory account or leave the firm.
The spokeswoman declined to discuss how much revenue the decision will cost Merrill, not only in sales to clients but in platform and distribution fees from fund companies.
Bank of America, which has paid more than $77 billion in fines in recent years to settle financial crisis charges, appears particularly sensitive to the potential legal consequences of violating the DOL rule’s fiduciary principle of putting customers’ interests ahead of brokers and their firms. It has taken a stricter approach to the rule than many rivals, recently telling advisors in its no-frills Merrill Edge discount brokerage unit that it will end all their commission-based account sales.
Edward Jones, which employs more than 14,000 brokers in mostly two-person offices, also has said that it will not allow sale of mutual funds and some exchange-traded funds in commission-based retirement accounts, though it has not totally banned commission accounts and is putting the policy in effect as of April 10.
“It is difficult to align the inconsistent pricing of mutual funds with the fiduciary standard in a transaction-based IRA,” a spokeswoman at the St. Louis-based company said.
Merrill as of Tuesday stopped accepting letters of intent for fund sales, will not allow fund exchanges as of April 10 and told brokers to cancel automatic investment program instructions in brokerage retirement accounts as soon as possible as they will not be executed once system blocks are in place, according to McDonnell’s memo.
In one piece of good news for advisors, the memo said that compensation trails for fund positions in legacy asset exemption accounts will continue to be paid on and after April 10.
“The decisions we’ve made….reflect our goal of ensuring that our advisors and our firm are best positioned to comply with the [fiduciary] rule,” McDonnell wrote.