Is your broker making investment decisions that are in your best interest?
Starting October 1, Merrill Lynch is reversing the retirement account commission ban that it instituted in 2016, again allowing advisors to charge commissions for trades made in client retirement accounts. Here’s a brief history of the situation, and a reminder to investment account owners, regardless of your brokerage firm.
History of the Merrill Lynch commission ban
The Merrill Lynch commission ban was implemented back in 2016 after the Department of Labor announced a new fiduciary rule requiring retirement investment advisors to put their clients’ best interests first, before all other interests. Advisors would be required to clearly disclose all potential conflicts, such as hidden fees. Merrill Lynch was actually an early adopter, and heavily advertised its ban of commission-based retirement accounts as a way to protect its clients’ best interests. The ad campaign was titled “We’re committed to your best interest. Not the status quo.”
The 5th Circuit Court of Appeals vacated (killed) the rule in June, 2018. Merrill Lynch subsequently reversed its commission ban, stating a variety of client-centric reasons. In fairness to Merrill Lynch, the firm will be adding new client disclosures, including clearer fee summaries. The good news here is that the Department of Labor fiduciary rule put the phrase “in the client’s best interest” in the spotlight.
What this means for you
This is a broader issue than just the Merrill Lynch decision. My concern with commission-based trading is that it may place best interests of the broker/advisor and brokerage firm in conflict with the best interests of the investor. We hope that the client wins out, but we’ve seen examples where that’s not the case.
I wrote another article about right-sizing your investment accounts, mentioning that during our client tax preparation activities, we sometimes see client investment accounts with very high fees in relation to the returns. In one example, fees exceeded $18,000 against gains of $4,000. Are the investor’s best interests really being represented there? Fee-only accounts remove that conflict, although fees are also not a perfect solution.
If you don’t know, ask!
It’s fair for brokers and financial advisors to be compensated for managing your money, but it’s critical for you to understand what you’re receiving in return for those fees – especially in commission-based accounts. Have your broker confirm your investment strategy in writing. If you don’t understand, or need clarification about the strategy or fees, ask questions. Your broker should be excited that you’ve taken an interest in your investments. If you don’t understand the answers to your questions, or would like a neutral review of your investment accounts, please contact us.
I was originally made aware of the Merrill Lynch decision during a Clark Howard Minute broadcast. Thanks Clark!
Neal Bach, CPA