BAC Bank of America Corporation

By Michael Wursthorn 

Bank of America Corp. executives called a key provision of the Obama administration's new rules on retirement accounts "inefficient and cumbersome," saying it contributed to their decision to end commission-based retirement accounts.

While discussing third-quarter earnings with analysts on Monday, executives of the Charlotte, N.C., bank further detailed the reasoning behind their decision earlier this month to stop giving advice to retirement savers who pay a commission after April, when new rules that require brokers to act in the best interests of retirement savers begin to take effect.

Instead, clients of the bank's Merrill Lynch brokerage who want retirement advice will have to pay a fee based on a percentage of their assets, which could mean higher costs for clients who prefer to buy and hold investments.

The rules, which were written by the Labor Department, are aimed at eliminating conflicted retirement advice from brokers that the government says costs American families $17 billion a year and pushes down annual returns on their retirement savings by a percentage point. Financial-industry leaders have said those figures are inflated.

While drafting the rule, the Labor Department maintained that commission-based individual retirement accounts are a better option for some retirement savers. It crafted a provision, known as the best-interest contract exemption, or BICE, to allow brokers to receive variable or commission-based compensation in some circumstances.

Bank of America executives said the provision was unworkable with IRAs.

"We came to this decision not to use the best exemption after a lot of months of thinking and research, and this is better for our advisers and it's better for our clients," Chief Financial Officer Paul Donofrio said. "The best-interest exemption is going to create confusion, it's got operational pain for clients [and] it's going to be inefficient and cumbersome for advisers."

Many brokerages haven't detailed how they plan to comply with the new retirement-account rules, which are expected to affect as much as $3 trillion of assets in the U.S., according to researcher Morningstar Inc. Some firms, such as Edward Jones and LPL Financial Holdings Inc., are using the best-interest contract exemption to continue offering some form of a commission-based IRA to investors.

The Labor Department didn't immediately comment on Bank of America's points.

Analysts and industry experts have said best-interest contracts carry considerable risks for brokerages since firms have to justify the varying compensation they can receive for investment products in commission-based accounts. It also opens firms up to class-action lawsuits from investors who feel their interests weren't served.

"That kind of potential liability is really enormous," said Kent Mason, a partner at law firm Davis & Harman LLP who focuses on retirement. "If you interpret something wrong under the [best-interest contract], every trade you did can be part of this class action."

Bank of America plans to use best-interest contracts only to advise Merrill Lynch clients on rollovers from commission-based accounts and 401(k) plans to a fee-based option.

Even before the new retirement rules were finalized, commissions had been declining in favor of fees.

Now the brokerage industry is expected to shift more clients from accounts that charge investors for each transaction made to those that charge a fee based on a percentage of the portfolio's assets.

Fee-based accounts tend to be more lucrative for brokerages. Morningstar estimates that fee-based accounts generate 60% more revenue than accounts that charge a commission. Brokerages say those higher fees are justified since fee-based accounts demand a higher level of care.

The rule is expected to affect less than 10% of Merrill's $2 trillion in assets, the bank has said. Merrill Lynch plans to offer discounts to clients who move to a fee-based IRA account, but the firm hasn't provided details on those price cuts.

Commissions have been a drag on Bank of America's wealth unit in recent quarters, as market volatility has caused clients to trade less, the bank said.

Third-quarter revenue at the bank's global wealth unit, which includes Merrill and private bank U.S. Trust, declined 2% to $4.4 billion from a year earlier because of lower commission revenue. Of that total, $500 million came from commissions, Chief Executive Brian Moynihan said.

The rules will likely cause "some modest revenue impact" in 2017, Mr. Donofrio said, but the buildup in fee-paying assets is expected to mitigate that in later years.

Commissions have "been declining in favor of financial advice to the client," Mr. Moynihan added. "You've seen a constant growth in asset-management fees, net interest income and other sources of revenue. And frankly a constant decline in the brokerage business across many years."

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

October 17, 2016 14:54 ET (18:54 GMT)

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