One of the factors that seems to have kept big wirehouses on the sidelines during the fight to overturn the fiduciary rule was that fact that they stand to gain a great deal of revenue from the new regulation. The DOL’s rule basically mandates a shift from commission-based charges to AUM-based fees, which by some estimates means 50%+ more in revenue. Well, the forecasted transition in fees is happening, with Merrill Lynch and Morgan Stanley both reporting big gains in fee-based accounts. The former’s fee-based accounts grew 19% in the second quarter, while Morgan Stanley saw its grow 17%.
FINSUM: There is a lot of money to be made for the big wirehouses, which is very likely why they have not gotten behind the push against the fiduciary rule. Will it be as beneficial for wirehouse brokers?
Our readers will know that we have long opposed the current version of the fiduciary rule, and are still hopeful much of it will ultimately be revised. However, today we want to run story arguing the opposite side, a devil’s advocate piece if you will. The argument comes from none other than Brian Moynihan, CEO of Bank of America. He contends that the DOL rule probably won’t change because it is part of a larger trend in financial services overall. Even if it does, he says it will not change the firm’s thinking about fee-based accounts. BAML shocked the world last year when it said it was entirely getting rid of commissions.
FINSUM: One of the problems with the current fight against the fiduciary rule is that big firms are not getting behind the effort. The reason why is that they stand to make more money (as BAML just did) from having the kind of fee-based accounts that the current rule demands. This may be why any revision efforts ultimately fail.
One of the big question marks in the industry right now is how the fiduciary rule will ultimately affect broker pay and revenue for wirehouses and independents as a whole. Well the industry got its first indication this week, as a close look at Merrill Lynch’s results shows that the firm is doing very well indeed. ML managed to convert over $27 bn into fee-based accounts in the quarter, a more than 400% increase from last year. That resulted in net income of $804m, up from $705m last year.
FINSUM: The fiduciary rule seems to be playing out just as firms hoped it would. Now, if the DOL abandons the private right of action clause but leaves the rest of the rule in place, I would be a dream situation for many firms, but not necessarily their advisors.
The implementation of the fiduciary rule has turned into nothing short of a political debacle, all driven by the DOL, an organization which has usurped the regulatory right to even make such a rule. Forbes has just put out an article showing why the whole mantra of the DOL’s rule is a lie. The idea that fee-only advisers are free of conflicts is false, as they have them just like commissioned brokers. For instance, since fee-based advisors make money from total assets managed, they would have a major conflict of interest when advising whether to pay off a mortgage or roll over a 401(k) to an IRA managed by the advisor, both very common situations. Furthermore, fee-based advice is hugely expensive, costing retirees much more over the life of the relationship than commissions would.
FINSUM: We fervently agree with Forbes’ take on this. Yes, brokers with commissions have conflicts, but so do more-expensive fee-based advisors. We should not have a rule that falsely idolizes the latter.
UBS had long been the big hold out against making business model changes in response to the fiduciary rule. For a long time they looked very wise as the rule appeared headed for the dumpster. However, the situation changed and the rule is set to be partially in force this week. Alongside that development, UBS has now altered its compensation structure, though it appears to be sticking with its guns to a large extent. The firm wants to minimize the impact on clients, so the only core change it is making is basing broker payouts on total assets under management rather than a portion of the fees and commissions produced.
FINSUM: UBS really hates the fiduciary rule and still seems to think it will be rescinded or significantly revised.