March 1, 2011 / 8:43 PM / 8 years ago

Brokerages veer on strategies for new retirement plan rules

NEW YORK (Reuters) - Major brokerage firms are taking different tacks in preparing brokers for expected new rules from the Department of Labor that will constrict their ability to advise companies on retirement plans.

Proposed rules being discussed this week would subject many current activities of brokers and investment consultants to a fiduciary standard of care, as defined under the Employee Retirement Income Security Act (ERISA).

The standard would limit brokers’ ability to recommend their firms’ proprietary investment products to employers and prohibit them from collecting commissions from product sponsors. Brokers also are concerned about a DOL regulation scheduled to take effect next January that requires them to disclose their conflicts of interest to the plan sponsors.

“This is a game changer, it’s hugely significant,” Marcia Wagner, a Boston-based attorney at The Wagner Law Group said of the new rules. “How can you tell this to your client and keep your client?”

Firms unwilling to give up in-house sales of proprietary products and brokers loathe to forego commissions would have to protect themselves with even bolder disclosures on plan documents that could steer away clients, she said.


Brokerage firms that do not directly provide recordkeeping services to sponsors of 401(k) and other retirement plans are more likely than others to acquiesce to having their brokers come under a fiduciary standard.

That’s why Morgan Stanley and UBS AG’s Wealth Management Americas unit are training brokers about the behavioral changes a fiduciary standard will require. Morgan Stanley is the biggest brokerage firm by number of brokers, and UBS the fourth largest.

Bank of America Corp’s Merrill Lynch and Wells Fargo & Co’sbroker-dealers, which are affiliated with banks that aggressively sell recordkeeping and other retirement plan services through brokers, have no such programs.

Even firms that encourage adaptation to a fiduciary standard limit their programs to their top retirement plan producers. About 1,000 of UBS’s 7,000 U.S. brokers have gone through the fiduciary program launched in mid-2008, and they oversee just under 20 percent of the $24 billion in plan assets that brokers service.

A similarly small fraction of Morgan Stanley’s 18,000 brokers have completed its fiduciary program, said Edward O’Connor, the firm’s head of retirement services. Within two or three years, however, he expects a majority of brokers active in the plan market to don the fiduciary mantle.

“This is what employers want,” O’Connor said. “They are more willing to a pay a fee for advice.”


One sticking point: Most U.S. brokers work with small companies and professional practices that pay slender fees, and may not be willing to give up outside commissions.

Brokers typically collect 50 basis points, or one half of one percent of the assets in plans with less than $1 million in assets, said Jason Roberts, chief executive of Los Angeles-based consulting firm Pension Resources Institute.

A wide-ranging group of retirement plan service providers and industry groups have told the Labor Department that brokers who give up commissions may be forced to raise their fees to levels that small companies cannot afford.

Some brokers unwilling or unable to become fiduciaries also fear that the quality of advice they can give will deteriorate under the DOL’s new restrictions.

“The broker would be sitting across from the plan sponsor, saying ‘Here are 20 mutual funds, but I don’t know if they are good for you,’” said Fred Reish, chairman of the employee benefits practice at law firm Reish & Reicher in Los Angeles. “They are never going to say that.”

Merrill Lynch and Wells Fargo contend that brokers can continue working with plan clients without accepting the fiduciary standard of care. Third-party plan administrators can often help plans make selections, they say.

Wells Fargo has no plans to expand fiduciary training beyond some 75 brokers in its 15,000, said Wayne Morris, head of the company’s institutional contract program.


Such reluctance is understandable given Baby Boomer demographics that have turbo-charged sales of funds and other products to 401(k) and other retirement plans at large banks such as Wells and Bank of America.

“Why would you take your top retirement plan advisers and prevent them from selling your platform?” said Reish.

Wells Fargo added $5.6 billion in 401(k) plan assets in 2010, more than double the $2.3 billion it added in 2009. Bank of America’s managed assets grew by $4.5 billion last year, almost four times the $1.2 billion of new assets gleaned in 2009.

Fred Barstein, who runs a retirement accreditation program at the University of California, Los Angeles, said brokers who have proven their value by increasing plan participation among employees have little to fear from new DOL rules.

“It’s not like advisers will walk in, say they’re not a fiduciary and all their clients will leave,” said Barstein.

Don’t tell that to Stephen Wilt.

After 20 years at Merrill Lynch, he quit in 2009 to become a registered investment adviser operating under a fiduciary standard at Akron, Ohio-based Captrust Financial Advisors.

“I had clients asking me if I could be a co-fiduciary with them and I couldn’t,” said Wilt, who works with 29 retirement plans with about $2 billion in assets. “I thought we were at risk of losing them.”

Reporting by Helen Kearney, editing by Jed Horowitz

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