REMEMBER TO VOTE: The value of advice versus the value of activity
Maybe through all the Presidential election coverage you missed Merrill Lynch’s most recent announcement.
As of next April 10, Merrill Lynch will no longer accept new, transaction compensated retirement accounts. They will also strongly encourage existing retirement accountholders to transition to advisory, fee-based accounts. As an investor, you essentially have the same choice as before except that if you want to be charged per trade you will no longer have the option to couple that with live, holistic advice. You can vote with your wallet on the value of advice or the value of action.
I don’t blame Merrill. The advisory model has been the preference for most broker-dealers (especially the wirehouses) for many years. They have realized that monitoring each individual trade, transaction, buy and sell for just suitability has been challenging and not as profitable as monitoring for an overall guided portfolio’s level of appropriateness. I actually applaud Merrill since very few large broker-dealers have stated steps that will be taken as the BD community, in particular, adjusts to the DOL rules that go into effect next April. It is worth noting that LPL and Edwards Jones have also announced changes around aligning with these new rules, although they are going a very different direction than Merrill Lynch. It is also worth noting that the SEC’s rules are not yet known and that the DOL rules impact only retirement assets (the definition of these and the transactions around them is also expanding). More change to come!
All groups involved will experience positives and negatives to this announcement. Merrill will expand the ability to focus controls over portfolios instead of positions. Advisors may have to adjust how they do business but this also means there is a chance of fewer accounts and fewer relationships to service. The downside for advisors will be further reduced the visibility of all the client assets on which to provide advice. This downside will also be shared by clients.
Those most directly hurt would be smaller investors, investors with fragmented retirement assets and those investors that desire streamlined, low-turnover portfolios but that also desire planning advice. While conflict of interest concerns by the DOL will result in changes and removal of these conflicts, I have a hard time seeing how removing access to advice – even possibly biased advice of suitable assets – makes the system better, safer for the investing public.
Many firms playing in the same market as the largest broker-dealer will have to make similar decisions without the resources to do so properly. These advisory-leaning decisions will stress their systems and processes to handle the volume of advisory fee-based accounts and the transition toward advice accounts. Many firms are using fragile infrastructures, dated processes, fragmented oversight tools and concentrated support staffs to administer and oversee advice based accounts. More firms will force investors to make a vote.
Several of First Rate solutions, including Fee Manager and the award-winning ExecView can support firms in this transition. To learn more about First Rate and these solutions, contact us today.
Patrick Flaherty, CIPM, is the Product Owner for CORE Performance and Integrations as well as the GM of Fee Manager. In addition to shaping the strategic direction and development of both products, Patrick is responsible for overseeing the operations of the Fee Manager business unit including developing and maintaining client and partner relationships. In 2011, he completed the requisite study and exams for the certificate in investment performance measurement (CIPM).