The rule, which is currently being pushed through Congress, is considered the equivalent of the UK’s retail distribution review (RDR).
It aims to put an end to hidden fees and conflicts of interest in the investment world, and will require advisers to pick products that are in their clients’ best interests when recommending investments for retirement accounts.
However, the rule has created some confusion on how clients pay for services and how brokers are compensated.
Commission-ban exemption
Clients who opt for commission-based accounts can do so under the DoL rule’s best interest contract exemption, which allows brokers to receive commissions on some products after signing an agreement with the client, said Morgan Stanley.
The bank added that it will allow its nearly 16,000 brokers to continue offering individual retirement accounts that charge investors per-transaction commissions rather than fees as a percentage of an investor’s assets.
Chief executive James Gorman told analysts last week it does not think giving wealth clients a choice will present compliance problems.
Morgan Stanley’s approach could mean lower costs for clients who don’t do much trading and could help the bank retain and poach advisers who rely on commission-based business, added the bank.
The move is significant as like Australia, much of America’s financial advice industry is dominated by big banks like Morgan Stanley, Merrill Lynch and Wells Fargo.
Merrill Lynch
It contrasts with rival Merrill Lynch’s decision earlier this month to scrap commission-based retirement accounts offered by its 14,000 advisers ahead of the fiduciary rule coming into play.
The bank’s executives have said they believe the best-interest contract is unworkable for commission-based retirement accounts (IRAs) and that not using it will reduce conflicts that might arise if brokers push clients to more expensive investment products.
However, clients who don’t want to transition to a fee-based account can switch to one of the Merrill Lynch’s online offerings, or remain in commission-based accounts but without the ability to make significant changes, explained the bank.
