Broker-dealer commission move draws watchful eyes

Register now

Commonwealth Financial Network, the nation’s largest privately owned broker-dealer, began preparing for the shift from commissions to fees years ago, but a bold new decision on this hotly contested topic is expected to garner close attention across the industry.

Commission-based products in qualified retirement accounts such as 401(k) plans will end by April 10, 2017 for the firm’s 1,650 independent advisers. The move recently was described as the first by an independent broker-dealer to acknowledge the Department of Labor’s conflict of interest rule “as a shot across the bow.”

Commonwealth anticipated an increased likelihood of regulatory sanctions and civil litigation, including class-action lawsuits, explains Wayne Bloom, the firm’s CEO. He also expressed discomfort with the DOL engaging plaintiff’s attorneys on enforcement as the burden of proof for client recommendations under the best interest contract exemption (BICE) shifts to advisers.

Since BICE offers only principles-based guidance for complying with the DOL’s fiduciary rule, Bloom says “even if we had re-priced and redesigned all of our commission-based relationships, we felt as though the legal and regulatory exposure would have been too significant.”

Pete Scruggs, a principal at Golsan Scruggs who runs the firm’s benefits practice, says it will be interesting to gauge the reaction to Commonwealth’s approach given that most broker-dealers allow commissions inside the retirement product space.

“What I see happening is either advisers not being able to take a fiduciary role due to B-D prohibition or needing to charge higher fees to account for the higher liability associated with a fiduciary role,” he opines. His firm has taken business from both Edward Jones brokers who assume fiduciary status and Wells Fargo, which has increased fees.

For brokers in a level compensation and fiduciary role, Scruggs says this shift in compensation represents “the biggest opportunity to take market share in many years. It has the feel of the onset of ACA and advisers either embracing it or fleeing to safer arenas.”

With the move to advice and access to trading executing available from Schwab, Fidelity and TD for a fee as a registered investment adviser, broker-dealers need to reinvent themselves, suggests Fred Barstein, founder and executive director of the Retirement Advisor University, which is offered in collaboration with the UCLA Anderson School of Management Executive Education.

He says that means providing practice management like Commonwealth, branding like Merrill Lynch, financial planning tools like Northwestern Mutual or a bit of all three like Edward Jones. “Those firms will be comfortable eliminating commissions as access to those products is no longer their core service or even that important to their advisers with financial planning tools available,” he explains.

Also see: 5 hopes for the benefits industry under president Trump.”

Commonwealth has embraced its fee-based business for more than two decades, according to Bloom. In fact, he reports that less than 10% of the firm’s net worth revenue is derived from commissions in retirement accounts, “and we believe that amount would continue to decline.”

After already spending millions on DOL compliance in the absence of significant commissions, “it would have been even more money to redesign workflows and compliance processes and technology,” he notes.

Related concerns were expressed about eroding future investment in improving the firm for its advisers and their investors, as well as the impact on non-retirement business sparking potentially awkward discussions with clients about having two different sets of loads or commission levels. “We also weren’t comfortable that FINRA or the SEC would really appreciate us having differing levels for the same product for the same investor,” Bloom says.

While most Commonwealth advisers understood the move, some worried about how to handle smaller accounts, which led to a lower minimum in some managed accounts to $1,000. Others fretted about the breadth of available products in variable annuities or the alternative space.

“We have a landing spot in the fee-based arena for almost everything they have,” he reports, noting how advisers have contributed good questions and suggestions.

In deciding to adopt a proactive stance, Commonwealth froze its payouts until January 2019 on the downside, without payouts being raised in the event that advisers transitioning from commissions to fees do more business. It’s also making loans available for advisers who experience a shortfall.

The most difficult part of Commonwealth’s decision on adviser commissions was cultural, according to Bloom. “Nobody joins an independent broker dealer to be told what to do,” he says. “Commonwealth is in the infrastructure business. As long as what our advisers are doing is investor-centric and compliant, we try and accommodate all forms of business. And in fact, we think commissioned business is still very appropriate for some clients, and that’s why it’s still available at Commonwealth on the non-qualified side.”

For reprint and licensing requests for this article, click here.
Fiduciary standard Fiduciary Rule Financial regulations Advisor strategies