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7 real life examples of how brokers are responding to the DOL rule

The April 10, 2017 effective date of the DoL fiduciary rule will find advisors exposed to compliance and litigation risk if they do not comply with over 1000 pages of regulation.

In short, the rule requires advisors who give retirement-related financial advice to act in the best interest of their clients. Though this sounds simple, it has huge implications on all aspects of the business, including fee structures, the products one could recommend, back office operations, documentation and IT.

Pundits have poured much ink on what might, should or could happen once the rule goes effective.  As April draws nigh, many players, though not all, are starting to adapt to the post-fiduciary world.

Here is a non-exhaustive list of what’s actually being done.

Merrill Lynch enforces commission-based compensation for retirement savers

Just last week Merrill Lynch told its more than 14,000 brokers that they would not be able to charge per trade commissions on retirement accounts. Brokers instead will have to charge a fee based on a percentage of assets.

Per trade commissions aren’t considered fiduciary as they might incentivize advisors to recommend trades that might not be beneficial to the client, but that benefit the advisor. A flat fee eliminates that incentive by changing the relationship from a sales relationship to ongoing advice.

Morgan Stanley, in its initiating coverage on four retail brokers, Charles Schwab, TD Ameritrade, E*Trade and LPL Financial, claimed shifting to the advice model would open a $22 trillion wealth pool for the brokers, driving revenues to $36 billion for the industry with mid-term earnings per share upside.

LPL standardizes commissions

LPL Financial also recently standardized its compensation structure. The firm set commissions on variable annuities to a standard 5.5% in May and also made plans to limit mutual fund sales commissions to a range between 3 and 3.5 percent

In addition, the company is phasing out direct ownership brokerage accounts, and ramping up advisory products, including a roboadvisor program with a $5,000 minimum that includes BlackRock funds.

Nationwide to acquire Jefferson National, expands footprint in fee-based advice.

In late September, Nationwide announced it will acquire Jefferson National, a distributor of tax-advantaged investing solutions for registered investment advisers, fee-based advisors and their clients.

“Partnering with the Jefferson National team will enable Nationwide to expand our distribution footprint and meet the needs of investors and retirement savers who want to do business in a fee-based advisor environment after implementation of the DOL fiduciary standard,” said Nationwide CEO Steve Rasmussen. “This will complement our strong brokerage distribution channel and allow customers to do business with us in the manner they prefer.”

State Farm cuts agents from mutual fund and variable annuity sales

State Farm, which has more than 18,000 agents, directed 12,000 of them to cease providing their clients with mutual funds, variable annuities and other investment products. After the effective date, clients will have to turn to a “self-directed call center” rather than their agents for help with their retirement accounts.

Many of the fiduciary rule opponents claimed that smaller retirement accounts may be orphaned, as lower fees will make them unprofitable for brokers. This move seems to strengthen their argument, though it is very possible new players will come in.

IMOs file for financial institution status under DoL Fiduciary Rule

Under the DoL Fiduciary Rule, only banks, insurance companies, broker-dealers and registered investment advisors are defined as financial institutions.

Recently, AmeriLife, an Insurance Marketing Organization, filed for financial institution status  that will allow its agents to keep selling retirement-related products under the new DoL rule. AmeriLife is the eighth IMO to file for such status. One main hurdle the IMOs will need to pass in order to qualify is convincing the regulators they are able to properly monitor and oversee their army of independent agents. Some restructuring will be needed.

BlackRock, expecting higher demand following DoL rule, slashes ETF prices

BlackRock is expecting the DoL rule to increase demand for ETFs for their cost-efficiency. In order to take advantage of that demand, BlackRock is repricing its U.S. iShares Core ETFs

“This is another critical milestone to help advisors as they prepare for the major shift the DoL fiduciary rule requires – providing investors with quality index exposures at great value in the center of their portfolios,” said Salim Ramji, head of BlackRock’s U.S. Wealth Advisory business. “These enhancements to the iShares Core are the latest innovation by BlackRock to help advisors build better portfolios for investors.”

Accenture, Fidelity launch software solutions to help wealth managers comply with DoL rule

One of the main challenges wealth advisors face when trying to comply with the new standards  is implementing decisioning capabilities to ensure clients’ best interests are taken into account. This process needs to be meticulously documented in order to be defensible in court in case of a lawsuit.

Accenture Wealth Management aims to do that with its Compliance Solution for Salesforce. The solution captures client data like investing experience, risk tolerance and investment goals to be used to support Department of Labor compliance. It also guides advisors through the product selection process, which can be used for a wide array of retirement and insurance products, and helps ensure that investment rationale suitability and client best interests are considered.

Similarly, Fidelity added compliance functions to its eMoney Advisor financial planning platform to help advisers meet the DoL requirements. More such solutions, like Envestnet offers, are coming to the market in growing numbers.

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Get those brokers back in here!: The CME signals the end of open outcry trading pits

finance can also be funny -- like these twitter accounts

An official at the Chicago Mercantile Exchange admitted Thursday that the company’s decision to close its New York open outcry trading floor at the end of the year is a sign of the times, but rejected the assertion that the move is a “nail in the coffin” of pit trading for the commodities and futures industry.

(John McDermott gives a terrific historic overview of the 168 year history of the open outcry era here)

A CME Group spokesperson told Tradestreaming that while the world of finance has largely digitalized, the Chicago trading floors for options and S&P 500 futures remain profitable, and that the traditional form of commodities trading would not disappear completely.

“We do not have a plan or timetable to close the Chicago floor,” the spokesperson said via email. “The majority of markets traded through open outcry in Chicago continue to meet predetermined volume and/or revenue requirements to keep them open. The remaining trading pits generate approximately $160-$170 million annually, or about 5 percent of total company revenue.”

Asked about traditionalist claims that some options trading is “too complicated” to be left to computers, the CME official agreed that electronic options volumes are growing, but added “we still see a number of options on futures trading strategies that are only possible via open outcry at this time.”

Despite CME’s insistence that there is a future for open outcry trading, even company spokespeople appear to believe that the writing is indeed on the wall. While insisting that traditional trading would continue, they also admitted that “our clients prefer to trade NYMEX and COMEX options electronically.” Looking to the future, they also said that “keeping our floors open for the last several years has allowed time to adjust to this overwhelming shift to the screen.”

The derivatives marketplace announced on April 13 that it would close its New York trading floor at year’s end, citing a sharp decline in open outcry options volume on the New York floor, with just 7,500 contracts at present, a 53% drop from 2015 and 0.3 percent of the company’s overall energy and metals trading volumes.

The move is the latest in a trend that began in November of 2000, when the London International Financial Futures Exchange closed its open outcry pits in favor of electronic trading. More recently, CME announced last year the closure of its open outcry futures pits in Chicago and New York, leaving the company with just two remaining trading floors, the Chicago-based options and S&P 500 futures contracts pits.

CME reported 2015 revenue of $3.3 billion and operating income was $2.0 billion. Net income was $1.25 billion and diluted earnings per share were $3.69.

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FINRA encouraging more transparency on brokers’ background, disciplinary records

FINRA promoting brokercheck to investors

After 2.5 years of back and forth, FINRA passed a rule requiring brokerages’ websites to link back to FINRA’s own BrokerCheck website, its database of broker regulatory disclosures, disciplinary actions, and general work history. Now, brokers will have to provide a link on their websites to BrokerCheck, enabling clients and prospects to research a prospective broker and competition for any red marks. [x_pullquote type=”right”]20% of brokers with the highest ex-ante predicted probability of investor harm are associated with more than 55% of investor harm events and the total dollar harm in our sample[/x_pullquote]

FINRA appears serious about encouraging investors to up their usage of BrokerCheck with a recent research report entitled Do Investors Have Valuable Information About Brokers? The report’s authors, who are both economists employed by the Office of the Chief Economist at FINRA, test for the predicability of investor harm based on BrokerCheck entries. While not a causal connection, the paper does find that a connection between investor harm and brokers in BrokerCheck who have the highest probability of inflicting damage on their clients.

brokercheck and investor protection

FINRA is clearly telling investors that if you want to protect yourself, use BrokerCheck before employing brokers and continue to monitor BrokerCheck throughout the life of a brokerage relationship to monitor for red flags.

This begs the question if FINRA’s intention is to turn BrokerCheck into a kind of Yelp or Trip Advisor for the brokerage industry? It appears that FINRA is definitely thinking in those terms, approving a multi-million dollas marketing campaign for the revamped BrokerCheck website with the goal of building awareness and traffic to the site among retail investors. This would position BrokerCheck in competition with BrightScope, which began as a broker research platform and has since expanded into researching 401(k) plans and funds.

Journalists are learning to turn to BrokerCheck when writing articles about financial advisors (whether or not they’re implicated in any misbehavior). Investors are becoming more aware of how research tools can be used to vet their service providers. But while there was some excitement among the broker community when Brightscope launched and its potential to turn the directory into a powerful marketing tool, that talk has died down. Without investors flocking to the site to use it like they would a Yelp or Angie’s List, advisors are talking a more dim view of the potential of directory services like this to change the way they do market to new investors. It appears that instead of using a database to match advisors and investors, the general use case for BrokerCheck is to merely look for skeletons in a broker’s regulatory closet once an investor has identified a potential service provider. BrokerCheck will be the database of choice.

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