Update: Morgan Stanley Unveils Target-Date Advisory IRA with Tiny Minimums
(Adds comment from Morningstar analyst in seven paragraph, and corrects sixth paragraph to say that Morgan Stanley does not charge its $75 annual account fee for the new Target-Date IRAs. A company spokesman earlier misstated the policy.)
Large brokerage firms have for years been incenting advisors to focus on large client accounts but Morgan Stanley has created a fee-based retirement product that appears to defy conventional wisdom.
Brokers can now get full payout credit for selling an Individual Retirement Account that carries a standard managed account fee but that can be funded with as little as $1,000. That contrasts with the $10,000 minimum that Morgan Stanley and other large firms require for most managed accounts.
The CGCM [Consulting Group Capital Markets] Target-Date Portfolio IRA, introduced in August, appears aimed at retaining clients in traditional commission-based retirement accounts who do not want to open, or cannot qualify for, a standard advisory account, brokers said. Under the Department of Labor’s forthcoming fiduciary rule, firms would have to contractually agree to act in clients’ best interests if they remain in commission-based accounts that normally carry a lower-level client-suitability standard.
A spokesman said the new product is meant for households that may want to open accounts for children or other relatives who do not have enough money to capture an advisor’s attention, but did not comment on whether its introduction is timed to complement the DOL rule that begins taking effect in April.
Morgan Stanley does not pay advisors on trades generating less than $250 in commission or on household accounts with less than $100,000, brokers said. The Target-Date Portfolio IRAs, however, are compensable on brokers’ normal grid payouts, the spokesman said.
Whether the new account type, which is applicable to standard IRAs and Roth IRAs, is a better deal than a commission-based IRA for small investors is another question. Brokers have flexibility in pricing Target-Date Portfolio IRAs, and most will charge the conventional fee of between 1% and 2% of assets, which includes the outside fund managers’ fees, a spokesman said. The annual account fee that Morgan Stanley charges for commission-based IRAs are waived for the new product, as for all advisory accounts, he said.
Paying reasonable fees for IRAs may make sense for investors if they receive a range of services besides investment management, but a 1-2% fee could be “a tough hurdle,” said David Blanchett, head of retirement research at Morningstar, who has not reviewed the new Morgan Stanley product.
Morningstar forecasts that equities will return less than 3% annually over the next ten years, he said.
The new Morgan Stanley IRA includes 10 portfolios of active and passive mutual funds and exchange-traded funds run by third-party investment managers who are chosen by Morgan Stanley’s Consulting Group that is run by Jim Tracy.