Merrill Lynch and Morgan Stanley: A tale of two fiduciary 401(k) business models

Each firm uses an approach that mitigates risk, but some observers say they're more for show than potential

The wealth management units at Merrill Lynch and Morgan Stanley (MS) within the past few weeks announced substantive changes to their respective 401(k) businesses, and while each approach shares common ground they also differ in notable ways.

Where the wirehouse brokerages primarily diverge is in the level of discretion they offer their retirement plan advisers, especially in the small-plan market, industry observers say.

While Merrill Lynch is offering advisers servicing 401(k) plans a fairly high level of discretion, Morgan Stanley is substituting some adviser discretion for more risk at the firm level, said Fred Barstein, founder and CEO of The Retirement Advisor University.

“If you look at the dial, the discretion isn't 100% with the (Merrill) adviser, but it's a lot (of discretion) with the adviser,” Mr. Barstein said. "The discretion of the ( Morgan Stanley) adviser becomes much, much less, almost zero."

The firms, each with adviser forces of greater than 14,000, are the first among their wirehouse peers to outline changes to how their representatives can conduct fiduciary 401(k) business as the Department of Labor's fiduciary rule looms.

As written, the regulation, which raises investment advice standards in retirement accounts, would fundamentally change the way many advisers, especially those servicing smaller 401(k) plans, can conduct business, because it would turn interactions currently considered non-fiduciary in nature into fiduciary interactions carrying a higher level of risk.

To address this, broker-dealers have had to consider guidelines within which their generalist 401(k) advisers, or those who don't specialize in 401(k) plans, can continue servicing retirement plans while controlling the firms' risk exposure.

One of Morgan Stanley's answers is a product called ClearFit, which advisers would need to use for 401(k) plans with less than $10 million. Morgan Stanley, rather than the adviser, assumes the fiduciary investment responsibility, monitoring and selecting the investments for the product's fund lineup.

As an alternative, Morgan Stanley is also working with “several” approved third-party 401(k) providers for the small market to provide investment fiduciary services, a spokeswoman said. She didn't identify any specific providers.

Merrill Lynch, on the other hand, is broadening the pool of advisers eligible to receive the training to become a designated retirement plan specialist. For example, to receive a Retirement Benefit Consultant designation, an adviser will need to advise on $30 million in plan assets, as opposed to $100 million at present.

Merrill Lynch and Morgan Stanley each have roughly 300 internally designated specialists who can service plans in a fiduciary capacity. Designated Merrill advisers are the ones who can offer fiduciary investment advice to retirement plan clients.

“You can't say one (approach) is right or wrong,” Mr. Barstein said. "What they're doing, and where I think all broker-dealers need to go and should go, is making that decision: Where do I want to put that discretion?"

Where the two firms are similar: the promotion of partnerships between generalist and specialist advisers.

Morgan Stanley, for example, will require non-specialists to partner with their specialized counterparts when servicing a plan with more than $10 million in assets. Merrill Lynch will require it for a plan of any size being serviced by a non-specialist.

The aforementioned changes, according to the Morgan Stanley spokeswoman, began to be rolled out at the beginning of the year and will be complete over the next few weeks. A Merrill spokeswoman wouldn't provide detail on the exact time frame for the firm's implementation.

The Trump administration is seeking to delay the rule's start date, currently April 10, by 60 days, and observers see the potential for further delays and changes to the rule.

Even if this occurs, though, those observers expect many of these policies to remain in place.

“I think both models are entirely legitimate ways to go,” Marcia Wagner, principal at The Wagner Law Group, said. “You can't have a straitjacket for the retirement industry. We're trying to get to the same goals, and two institutions are getting there in two different ways.”

"Merrill Lynch and Morgan Stanley: A tale of two fiduciary 401(k) business models" originally appeared on InvestmentNews, a sister publication of Pensions & Investments.