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Commonwealth Financial to dump commission business for IRA and 401(k) accounts

Overcoming a 'challenging decision culturally,' Wayne Bloom pulls the trigger ahead of IBD rivals for his Waltham, Mass.-based broker-dealer

Monday, October 24, 2016 – 10:47 PM by Brooke Southall
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Wayne Bloom: Are you going to sit around and hope? You can't do that.

This article was updated with the comments of Ameriprise CEO to show what the exact opposite DOL attitude looks like at a broker-dealer.

Brooke's Note: This news broke late yesterday so I wasn't able to reach Wayne Bloom, who will take credit or blame for his company's decision to pioneer a capitulation or sorts to the new DOL rules. But when I reached him this morning, what came across was that though his play to zap commission sales from retirement accounts is a trifle iconoclastic, that it wasn't even a close call either. "The cost-benefit was way out of whack not to mention the two words: 'class' and 'action,'" Bloom said. So it came down to weighing the culture. But Commonwealth has already done big-time spade work in the conversion to fee business over several years so that softening of resistance negated the need for any real culture war -- just a little culture shock in time for dinner.

Commonwealth Financial Network will end the practice of charging commissions in retirement accounts.

The nation's largest privately owned broker-dealer sent its 1,650 advisors an email to let them know it will no longer enable its affiliated brokers to offer commission-sold products in IRAs or qualified accounts like 401(k)s, effective Apr. 10, 2017.

Since then, the company has received "dozens and dozens" of phone calls from advisors with questions "zeroing in" on specific accounts like SEPs, according to Commonwealth CEO Wayne Bloom. 

Not every call was friendly or accepting of dealing with changes in workflow, compensation changes and other pains -- not to mention the sense of cultural identity,

Still, he was gratified at the reception not only to his decision to make this decision but to go ahead and do it when fellow IBD execs are holding fire.

Big Picture

"The big picture people get," he says. Bloom mentions calls he made directly to brokers at Commonwealth who only charge commissions and says that even those advisors were understanding about the change. "They said: We saw the change coming. They have been very receptive,"

In making the move, Commonwealth becomes the first of the independent broker-dealers acknowledge the Department of Labor’s conflict of interest rule as a shot across the bow.  The Waltham, Mass.- and San Diego-based BD serves 1,650 independent advisors nationwide that operate as registered representatives, investment adviser representatives, and registered investment advisers.

The move by Bloom, follows a similar announcement by Merrill Lynch a few weeks ago that roughly coincided with that firm's decisions to replace its brokerage chief, John Thiel, with Andy Sieg, a retirement executive within the firm. Using DOL as cover, Bank of America cuts the Merrill Lynch bull as it adds a robo, stops paying brokers to stick around and kicks John Thiel upstairs

Though experts presumed Merrill's rivals would soon follow suit, Reuters reports that Morgan Stanley seems to be leaning the other direction.

For now Ameriprise is prepared to run the DOL Strait of Magellan, too, though its CEO Jim Cracchiolo was explicit about just how diffucult and expensive it is to undertake.

"We have anywhere from 500 people to 1,000 people working on this DOL initiative right now embedded in our firm, just based on how we're redeploying resources, because the timeframe to get this done is pretty short, and the amount of effort to get it done is pretty significant," he told Wall Street analysts on the morning of Oct. 26.

But he frames the decision to adjust to DOL on behalf of 13,000-plus advisors and brokers rather than cede to its torrent as one of size and resources.

"So we feel we do have the ability to do that. Many firms will not have that ability or be able to support their advisors to make that change. Remember, advisors have to make these changes across their book, and many advisors have 300 clients or 500 clients. And so, it's a big change for them."

No northern exposure

Giving wealth clients a choice won't present compliance problems to Morgan Stanley, said CEO James Gorman, in a Reuters story that quotes a public analysts call.

"I don't think that giving clients choice heightens one's legal exposure and, in fact, that just seems a little counterintuitive," he told Reuters.

Bloom had a strong retort for the kind of thinking that Gorman espouses. "Are you going to sit around and hope? You can't do that."

In its release, Commonwealth, which has 775 employes, allowed that the decision was wrenching one in that it counters the firm's long-standing narrative about giving the advisor leeway to manage client accounts in a way that suits them.

"This was a challenging decision culturally, however, as Commonwealth holds strongly to our founding belief of offering advisors both choice and the freedom to craft their businesses in the way that allows them to best serve their clients," the statement read. See: Why it took 13 years and one bad Beverly Hills moment for a $92-million AUA advisor to leave LPL for Commonwealth

Indeed, when Merrill Lynch chose to nix commissions, sources pointed to how it was self-serving by the bank in the sense that it would lessen the firm's potential liability exposure and compliance costs.

One set of rules

In its release, Commonwealth says what is good for goose is good for the gander.

"We feel strongly that our decision to cease offering commission-based products in retirement accounts positions Commonwealth and our network of advisors, as well as investors, advantageously for the future."

Indeed, many experts believe advisors could be put in a difficult position by living under one set of rules for IRAs and another for non-IRA assets that could land them in hot water. Experts all believe that it may just be a matter of time before the SEC brings rules on non-ERISA assets in line with ERISA assets. See: DOL glows and Invesco glowers over $10 million settlement of alleged ERISA infraction

More than 'suitable'

For Commonwealth, 100% owned and controlled by the 11 managing principals of the firm, the cultural departure is less than it might be for other broker-dealers because the firm -- which specializes in serving big practices -- has already edged away from a suitability standard in favor of one that looks more purely clients first. 

"Commonwealth’s network of advisors has already embraced the notion of fiduciary responsibility, and clients have responded enthusiastically to that structure," the release states. "Commonwealth wholeheartedly supports a fiduciary standard; in fact, the vast majority of our business is already conducted in that manner.·" See: Why robo-advisors meet the lofty fiduciary standard when so few humans can, according to an opinion written by Betterment's outside counsel

That said, Commonwealth is committed to doing commission business outside ERISA purview.  "Although we have taken this step in relation to retirement accounts, we continue to believe that a commission-based approach remains an attractive and appropriate option for many investors—and thus we will continue supporting that option for non-retirement accounts."

April reigns

Less than 10% of Commonwealth’s revenue is derived from commissions on retirement accounts. The firm had $1 billion revenue in 2005 and $100 billion of assets advised by advisors.

There is method behind announcing the change so far ahead of implementation, Commonwealth writes.

"As this new policy does not become effective until April 10, 2017, there is ample opportunity for 2016 tax-year contributions to be made on either a commission or a fee basis."

But wasn't there a safety-in-numbers factor that would have allowed Commonwealth to kick this can much farther down the road.

Mentioned in this article:

Commonwealth Financial Network
RIA-Friendly Broker-Dealer, Tech: Other
Top Executive: Wayne Bloom

Laurence Kandel

Laurence Kandel

October 24, 2016 — 11:28 PM

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