UPDATE: Edward Jones Revs Up Product to Appease DOL Vampire
(Adds references to robo-advice alternatives in penultimate paragraph and lawyer Marcia Wagner’s name in 11th paragraph.)
Edward Jones’ more than 14,000 brokers fielded a tantalizing email from headquarters this week. It outlined a new managed account that suggests the mass-market brokerage firm may be first out of the box with a product tailored to the restrictive retirement advice rule that the Department of Labor is expected to soon release.
A Jones spokesman declined to comment on the new product that the company is . Brokers described the product as a low-fee managed account that complies with the forthcoming rule’s near-ban on commissions for retirement sales.
It also appears to offer Jones some protection from class-action lawsuits that the proposed DOL rule could spur because Guided Solutions investments will be “non-discretionary.” That means a broker must get permission from a client before making changes in an account.
“It’s like a brokerage account with a flat fee,” said an advisor in the Midwest, who like other Jones brokers and office administrators spoke on condition of anonymity because they are not authorized to speak on the company’s behalf. Like most Jones brokers, she books the bulk of her revenue from sales of commission products in nondiscretionary accounts.
According to a posting on its website seeking a Guided Solutions , Jones plans to introduce the product this year. One broker was told that it will be piloted in the spring with hopes for a national account rollout in Jones’ more than 11,000 offices in the summer.
From a client perspective, Guided Solutions will charge a lower fee than is typical for a managed wrap-account product. In most cases, clients will pay around 1.2% of assets kept in the program, including fund expenses, which should generally translate to less than they would pay for some individual trades in traditional commission accounts, according to one advisor.
Jones’ core managed account platform, called Advisory Solutions, charges at least 1.35%, according to its website, but that can reach closer to 2% when including underlying fund expenses.
The new product is a big concession for Jones and its advisers. The St. Louis-based partnership derived 76% of its total revenue of $5.0 billion in the first nine months of 2015 from selling and servicing mutual fund and annuity products, according to the company’s most recently filed earnings statement with the Securities and Exchange Commission. Much of it comes through mutual fund and other managed product trading commissions.
“Significant reductions in these revenues due to regulatory reform or other changes to the Partnership’s relationship with mutual fund companies could have a material adverse effect on the Partnership’s results of operations, financial condition, and liquidity,” Jones wrote in what is no longer just a boilerplate piece of disclosure.
It could not be learned whether Jones will try to bulk up its profit by packaging its into Guided Solutions.
“The Department of Labor is doing a lot of this stuff for one reason, to get more reasonable fees to the retail marketplace,” said Marcia Wagner, a Boston-based lawyer who specializes in retirement account law. “Anything going into that vector—assuming the services are reasonable for that fee—is a good thing.”
Advisors are still unsure how they will be credited for Guided Solutions sales. Since they will be fee-based accounts subject to a fiduciary standard, it is all but certain that they will not be able to receive ongoing commission “trails,” as they do for selling Class A mutual fund shares.
Jones, however, is facing reality, brokers and consultants said.
The DOL rule is now being vetted by the White House’s Office of Management and Budget and is strongly endorsed by President Obama. That means that despite to replace the Labor Department rule, it will likely be adopted this year while the President would veto any congressional attempt to void it.
The securities industry lobbied strongly against the proposed plan to segregate retirement savings into fee-based advisory accounts, saying it would hurt middle- and lower-income investors who cannot afford the cost of such accounts.
The industry attracts hundreds of millions of dollars annually from people who are persuaded to roll over retirement savings from their 401(k)s and other workplace accounts into individual retirement accounts at brokerage and advisory firms.
The DOL rule, as last proposed, would prohibit advising clients and prospects about such rollovers unless they sign contracts that make most brokerage executives blanch.The contracts would explicitly state that a broker and his or her firm may not be acting in a client’s best interest and would permit clients to join class-action lawsuits that are prohibited in standard accounts.
Jones’ decision to introduce a potentially less profitable managed account product is the lesser of evils, according to some consultants, and is likely to be copied by, or may already be in pilot stages at, other large and small brokerage firms.
Several firms, including RBC Wealth Management, are testing automated investment programs known as robo-advisers that charge cut-rate fees well below those planned for AdvisorSolutions.
“I can tell you a lot of people are thinking about [DOL-compliant products],” said Wagner, noting she has no specific knowledge of Jones’ plans. “It’s about to be a tsunami.”
Jed Horowitz contributed reporting.