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Will Morgan Stanley Replicate Merrill Lynch?

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By Mack Bekeza

During Morgan Stanley’s third quarter earnings conference call, James Gorman (CEO of Morgan Stanley) stated that the firm will announce their plan to comply with the DOL’s upcoming Fiduciary rule within the next couple of weeks. However, James Gorman did state that “we are not changing things”, “we run our business with the values of doing everything we can to support our clients and we will continue to do so.” In other words, Morgan Stanley will more than likely not go the Merrill Lynch route by no longer offering commission based IRA accounts.

So, if Morgan Stanley decides not to forgo commission based retirement accounts, what would be another possible strategy for them? Although the Fiduciary Rule will technically still allow commissions, it will be required for brokers and advisors to disclose all conflicts of interests to their clients with retirement accounts. It is also important to note that Morgan Stanley’s wealth management division currently oversees $2.1 trillion in client assets, with $855 billion of those assets being under a fee-based model which is a 75% increase from the third quarter of last year. In other words, Morgan Stanley’s strategy could have a significant ripple effect with their clients as well as their advisors.

In addition, Morgan Stanley was charged by the Commonwealth of Massachusetts with “conducting an unethical, high-pressure, sales contest amongst its financial advisors to encourage clients to borrow money against their brokerage accounts.” Morgan Stanley says the allegation is “without merit” and will “vigorously” defend itself. Please note that Morgan Stanley has $70 Billion in client loan balances, which is a new record according to them.

With Morgan Stanley’s strong stance on how they run their business, it will be very interesting to see how this will all play out in the next couple of weeks. And if the charges from Massachusetts are correct, Morgan Stanley will face a world of hurt from regulators and potentially lose client assets. Click on the links to read further into Morgan Stanley’s conference call and the Massachusetts allegations.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@Castlerockinvesting.com

Who is Trying to Stop the Fiduciary Rule?

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By Mack Bekeza

On September 21rst, US District Court Judge Daniel Crabtree over saw a preliminary injunction hearing involving Market Synergy Group (“Market Synergy”) and the Department of Labor (“The DOL”). Market Synergy is an independent marketing organization (“IMO”) that represents 20,000 independent insurance agents and claims that the new DOL fiduciary rule will create irreparable harm to these agents. Specifically, they believe that independent agents selling Fixed Indexed Annuities (“FIAs”) should not be required to comply with the new rule.

One of Market Synergy’s primary claims is that IMOs are not considered “Financial Institutions”, a requirement to be subject to the rule, and therefore are not required to comply. They also claim that the DOL lacks the authority to regulate FIAs.

In our opinion, even if Market Synergy and other IMOs are not considered “financial institutions”, they are still selling FIAs that are primarily purchased via individual retirement accounts and, therefore, should be subject to the new rule. On top of that, FIAs typically pay notable commissions to agents, regardless if they are independent or not. In other words, these agents still need to prove that selling a FIA is in the retirement investors’ best interest.

Secondly, although states technically regulate insurance products, Judge Crabtree pressed Market Synergy, asking, “Couldn’t the federal government step in to regulate fixed indexed annuities if the states were doing a bad job regulating fixed indexed annuities?” Market Synergy agreed that if the DOL found that the states’ regulations were “woefully inadequate”, federal agencies, such as the DOL, could further regulate such products. Market Synergy essentially shot itself in the foot by agreeing to that statement.

Although Judge Crabtree is skeptical about Market Synergy’s claims, he is also skeptical whether or not the DOL has a strong claim that IMOs and their independent agents are subject to the new fiduciary regulation. In other words, there is still a possibility that an injunction will be placed on the DOL which will allow these agents to sell high commission products to retirement investors.

What are your thoughts on the case?

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at Mack@castlerockinvesting.com or via phone at 303-719-7523

State Farm and Edward Jones React to the Fiduciary Rule

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By Mack Bekeza

With April 10th, 2017 quickly approaching, a large number of investment firms and insurance agencies are scrambling to comply with the DOL fiduciary regulation. However, some firms believe they have found a solution to the upcoming rule. Knowing that their representatives cannot put their clients’ interest first, State Farm and Edward Jones have announced plans to prevent their employees from selling mutual funds when the new fiduciary rule takes effect next April.

So how will they be able to do this without significantly reducing their revenue? State Farm plans to only sell and service their mutual funds, variable products, and tax-qualified bank deposit products by a self-directed call center, as opposed to having their agents sell the products directly. In other words, State Farm still wants their customers to purchase these products while being able to avoid liability if the product turns out not being in a customer’s best interest.

Edward Jones’s solution involves curtailing retirement savers’ access to mutual funds in commission based accounts and lowering their investment minimums. Basically, Edward Jones is planning to shift completely into the fee only side of compensation for retirement accounts and allow more investors to move their money to them.

Although it will be interesting to see how State Farm’s self-directed call center will play out, at least they have a strategy to deal with the upcoming rule. As for Edward Jones, going completely towards the fee-only side for retirement accounts is a good move as they are eliminating a major conflict of interest for recommending certain products.

Although there are a number of firms still trying to strategize to comply with the DOL rule, we are still waiting to hear plans of other advisers that sell investments that may not be in their clients’ best interest. However, we will attempt to keep you posted as more firms finalize their strategies.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

Fund Families sued by their own employees over their retirement plans??

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By Mack Bekeza

Over the past two years, a number of investment firms have been sued by their employees over their 401(k) plans. That’s right! Investment firms have been sued over their own in-house retirement plans! Why? In most cases, these firms would only provide proprietary funds to their employees at a full or slightly reduced cost. In fact, here are just a few of the recent cases from the past two years:

1. Transamerica
2. Fidelity Investments
3. Ameriprise
4. New York Life
5. Great West (Empower)
6. MFS Investment Management
7. Waddell and Reed
8. Allianz Global Investors
9. MassMutual
10. Neuberger Berman
11. Putnam Investments
12. BB&T
13. Edward Jones
14. Morgan Stanley
15. American Century

Why do these investment firms offer their own funds to their employees without significantly lower fees? First, they do not want to convey to their employees that there are potentially superior investment opportunities outside of the company. For instance, Fidelity might not want to offer an outside fund that could be cheaper and possibly better performing than a comparable Fidelity fund. Additionally, since these plans tend to be very significant in size, reducing investment fees for their own employees could be problematic, since it could potentially increase fees for their retail investors to absorb the cost.

Is there a solution to this dilemma? Yes, there actually is! For the investment firms that are currently offering their proprietary funds to their employees without reduced expenses, these firms should consider offering outside funds to their employees. This could potentially result in lower expenses for the employees. Furthermore, this could remove the target off their backs from ERISA once the DOL regulation becomes effective in April of 2017. Of course, this is a lot easier said than done because it requires investment firms to expose their weak spots in their investment line ups, which could also potentially leak out to their retail investors. Also, a retirement plan was never meant to make the employer money, it is supposed to be a generous benefit for its employees.

With the new DOL regulation coming in April 2017, 2016 has proven that broker dealers and investment advisors are not the only target, but the fund families have also been dealing with quite the roller coaster themselves. And, as retirement investors, we should be glad that the investment business is starting to clean up its act for good and will in return make the industry more beneficial for everyone.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523