Dec. 01–Wells Fargo Advisors will keep offering commission-based accounts to retirement clients if the new federal “fiduciary rule” takes effect in April, according to a memo the firm sent to advisers Thursday.
The St. Louis-based firm, the nation’s third-largest retail brokerage, will give advisers a list of investments approved for retirement accounts, and advisers will choose from that list.
In effect, Wells Fargo has opted for the legally riskier of the two ways brokerages could comply with the new rule.
It revealed its decision amid speculation that President-elect Donald Trump might try to change or modify the rule. Republicans in Congress, led by Rep. Ann Wagner, R-Ballwin, have been trying to do that through legislation, but have been blocked in the Senate. Once in office, Trump could act on his own, although the legal rule-changing process could take months.
The rule, approved by the Labor Department under President Barack Obama, requires brokers and brokerages to put their clients’ interest above their own when advising on retirement accounts.
The current rule requires only that an investment be “suitable” and not necessarily the best for the client. That could tempt brokers to recommend investments that pay the biggest commissions.
Brokerages could comply with the rule by eliminating all commissions and simply charging a set fee for advice. The business has been trending toward such “wrap accounts” anyway, but brokers say their fees would be too high for clients with small balances.
Wells Fargo offers such fee-based accounts.
Brokerages can keep commissions if they promise to act in the client’s best interest and reveal how they are paid. But that option requires careful documentation for recommendations, which is costly, and leaves the firm more vulnerable to legal actions by dissatisfied investors.
The flat-fee option is probably best for clients, said Harold Evensky, a professor of personal financial planning at Texas Tech University in Lubbock. Clients better understand what they’re paying for advice, he said. A commission system can make that hard to tell.
By retaining commissions, Wells Fargo is betting that the rule will be repealed, Evensky said. “They’re really thinking that they may not have to do anything,” he said.
Firms that opt to keep commissions often limit brokers to a list of investments, all of which pay brokers about the same, in an effort to ease conflicts of interest. That means negotiating with mutual fund and annuity providers to change their commission structures.
Firms are taking different approaches to meet the rule. Edward Jones, the brokerage giant based in Des Peres, will allow commissions only for retirement accounts over $100,000, and it won’t allow mutual fund trades in commission-based accounts. Smaller accounts will be fee-based.
Merrill Lynch is eliminating commissions for retirement accounts.
Speculation in the industry holds that commission accounts will eventually fade away because of the legal risk. Clients with small accounts — perhaps those under $25,000 — would be served through telephone advice services, or computerized “robo-advisors.”
Wells Fargo Advisors last month announced plans to launch its own robo service in alliance with San Francisco-based SigFig.
Jim Gallagher –314-340-8390
@JimGallagher14 on Twitter
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