Merrill Lynch and Morgan Stanley are going in opposite directions once again, as the former told advisers that its grid is unchanged under next year's comp plan while the latter raised some hurdles by 10%.
But even as these two firms and others roll out new compensation plans, some industry experts say broker pay could change in unexpected ways next year as wealth management firms move to comply with the Department of Labor's new regulation.
As part of its implementation plan, Merrill Lynch is dropping commission-based retirement accounts while Morgan Stanley will continue offering such accounts under the rule's best interest contract exemption.
"I'm not surprised to see that the bigger firms are not putting out modified grids under the fiduciary rule," says Thomas Clark, an attorney at Wagner Law Group. "People are playing that close to the chest because of the uncertainty around the FAQs and whether the rule will survive as is."
Clark, who specializes in the law that gives the Labor Department authority to regulate retirement assets, says that there is a fear among wealth management firms that advisers might switch firms if they perceive policy changes as harmful to their practices.
"You could publish [your comp plan] and then teams move to someone else who hasn't published theirs. You don't necessarily want to be the first one out of the gate," he says.
NOT THE FIRST TIME
Making comp plans mid-year is rare, but not unheard of, says a former Morgan Stanley manager, who asked not to be named.
The manager, who now works at an independent firm, recalls having to present the new comp plan at the end of each year, and that it would consist of a lengthy brochure explaining the details as well as a slideshow.
"I hated giving people these forward looking statements. They'd inevitably show what your compensation would be in a year from now or five years, and it'd be wrong," he says.
Earlier this year, firms have made changes to other aspects of broker pay, notably recruiting deals, after the Labor Department issued additional regulatory guidance in October.
The department said that back-end compensation common in many transition packages could create conflicts of interest.
The department also expressed concern that the design of compensation grids could create conflicts of interest. For example, if the jump between grids was too large, it might incentivize brokers in the wrong way, the department said. Further regulatory guidance is expected to come before April 2017.
A Merrill Lynch spokeswoman declined to comment on compensation and the firm's fiduciary compliance plans.
But a person familiar with the matter says the firm has been positioning itself for some time to embrace a fiduciary future, and that it will be sticking with its decision to drop commission-based retirement accounts regardless of whether Congress or President-elect Trump overturns the Labor Department's regulation.
Merrill sees itself as having removed potential comp conflicts with regard to advised brokerage IRA accounts, the person says. The firm also thinks that it mitigated potential conflicts for such legacy accounts because it stopped selling mutual funds products in those accounts in October.
Under next year's compensation plan, Merrill is requiring advisers to make two client referrals to other parts of the bank, up from one referral under the 2016 comp plan; those referrals do not have to result in business, the person says.
Morgan Stanley says its comp plan is fiduciary compliant.
"The 2017 compensation program applies to all accounts, including retirement, and was designed in anticipation of the DOL fiduciary rule going into effect next year," a spokeswoman says.
Wells Fargo has yet to reveal its 2017 compensation plan. UBS unveiled its plan in June. A spokesman did not respond to requests for additional comment on Wednesday.
UNEXPECTED CHANGES ON THE HORIZON
Denise Valentine, an analyst at Aite Group, says that complying with the fiduciary rule will be somewhat of an evolutionary process; to a certain degree firms will have to see what works.
For example, Valentine points to the fact that the rule calls for brokers to charge clients reasonable compensation, a standard that is market-based.
"We don't have to a database that shows how everyone is pay what," she says.
Valentine adds: "The rule calls for compensation to be in line with the marketplace. If you don't have a go-to recognized source for that, then you are kind of holding your thumb in the wind."
Compensation practices may also change as a result of regulatory enforcement cases or lawsuits brought by clients, experts say. And fiduciary opponents have charged that the rule increases liability risks for wealth managers.
David Sobel, an attorney at Jacko Law Group, anticipates that the industry will move towards more fee-based business over the long term partially.
"I think on the investment adviser side, commission business will be a thing of the past. I think everyone will move to level fee because there are too many things to do and too many opportunities to [get tripped up]," he says. "It's a much easier rule to follow if you are a level fee fiduciary."
Some broker pay changes occur over a longer term period. Andy Tasnady, a compensation consultant, does not anticipate that firms will make significant changes to their compensations plans mid-year. But, he says, client reactions to how firms implement the rule next year could drive unexpected changes.
"Will there be a challenge with everyone signing these best interest contracts? In other words, will there be a change in client acquisition and retention?" Tasnady asks. "That's when you should look for them to make potential changes to the compensation structure."