The brokerage arm of Bank of America Corp (NYSE:BAC) — Merrill Lynch — has been a respectable profit center for the big bank ever since it was acquired back in 2009. However, BAC stock owners who were looking for the unit’s revenue contribution to kick into high gear on the heels of Trump’s pro-business agenda may want to temper those expectations.
Some newly proposed rules from the Department of Labor could put the kibosh on that potential growth.
That’s not a misprint.
The suggested rule changes originally set to go into effect next week have been postponed until June. They could be altered or postponed again in the meantime. But regulators as well as consumers have tipped their hand. The change is coming, in one form or another, and the Bank of America brokerage division is going to adapt. Indeed, it already has.
The impact still isn’t perfectly clear, but it’s clearly not going to bolster the bank’s brokerage business.
New Fiduciary Rules
The short version of the story is, rather than merely determining that a specific stock or mutual fund trade in an IRA is a suitable one for a particular client, a stock broker/investment adviser must now act in a client’s best interest … in all ways, at all times, for a specific client.
This new standard also takes into account how that adviser is compensated. A mutual fund or an annuity purchased within a retirement account may be a sound investment for an individual. But the fact these products result in higher payout for the broker may mean those products aren’t necessarily in that person’s best interest.
In simpler terms, a broker or commission-based adviser will be a true fiduciary if the DoL’s proposed rules are put into place.
The suggested rules don’t necessarily preclude certain types of trades or products from an IRA account, but brokerage firms haven’t left anything to chance. Any actions that might even be accused of violating the fiduciary standard are already being banned.
Case(s) in point: JPMorgan Chase & Co. (NYSE:JPM) will stop charging commissions for IRA account trades suggested by a broker. Instead, JPMorgan’s clients with an IRA will have a choice of paying a flat annual fee to that adviser, or manage their own account without getting advice from a broker. Merrill Lynch is doing something similar, as are others.
Morgan Stanley (NYSE:MS), on the other hand, isn’t following that lead. Instead, Morgan Stanley is keeping its commission-based IRA model, certain it will be able to meet the new fiduciary standard and sidestep any conflict of interest concerns.
Impact on Bank of America
If you’re wondering, yes — this is a reason for BAC stock longs to be concerned.
In jeopardy is a wide swath of revenue that its Merrill Lynch arm had been producing. The potential impact on the bank’s bottom line stems from the added cost of compliance with new rules, and lost commissions; fee-based generally aren’t as profitable.
The amount of Merrill’s assets that would be affected by the implementation of the new rules depends on who you ask. The bank says only 10% of Merrill Lynch’s revenue — or $200 billion of its $2 trillion in assets — were subject to the stricter regulations.
Jason Roberts, CEO of Pension Resource Institute LLC, isn’t so sure. He notes that it’s not unusual for 60% of a brokerage firm’s revenues to be driven by the IRA account.
For perspective, Bank of America’s wealth and investment management arm generated $2.8 billion worth of income last year. That’s 15% of the $17.9 billion in net profits BofA mustered for 2016.
2017 isn’t looking like it’s going to be as fruitful on the brokerage and investment advice front, if recent abdications are any indication. Too many of the firm’s brokers are leaving for greener pastures. Take, for instance, the fact that three of Merrill’s top-producing brokers left the firm last week, moving to Morgan Stanley (and likely taking a huge chunk of the $600 million in assets they managed with them).
That’s just a microcosm of a bigger wave of defections underway — defections of experienced, commission-oriented veterans that won’t be easy to replace.
Bottom Line for BAC Stock
The Department of Labor’s rules are a moving target, so the final impact — if any — will be difficult to gauge. But the fact many of Merrill’s brokers are already on their way out even before any changes are set in stone is telling.
BAC stock holders should be concerned. While its brokerage business isn’t a huge slice of its revenue pie, it’s not a small one, either.
And a massive wave of disruption is headed its way.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
