Morgan Stanley has taken a different path from a major rival in retaining the option for clients to pay commissions for advisors for accounts covered by the new fiduciary rule.

As banks and other financial players adjust to the new US fiduciary rule, Morgan Stanley has announced that wealth management clients can if they wish continue to pay commissions for advisors, putting it on a different track to rival Bank of America Merrill Lynch.

Morgan Stanley says clients can also choose the option of paying a fee based on the value of account assets, according to a statement yesterday.

In April this year, the US Department of Labor brought out a much-anticipated rule that imposes standards on how brokers charge clients to make sure they put customers’ interests first. The rule is designed, its supporters say, to make financial services in the US more professional and less subject to product “push” from fund providers and other entities. The rule is expected to affect about $3 trillion of client assets in the US (source: Wall Street Journal, Morningstar).

Broker-dealers such as Morgan Stanley have argued that the rule, while meeting certain requirements, should not deprive clients who may remain comfortable with paying commissions as in the past. In the UK, by contrast, a regulatory regime called the Retail Distribution Review has stamped out use of trail commissions for any advisor deemed “independent”, driving a large number of advisors to merge, sell up or try and transform their business models. In Singapore, the regulator hasn’t banned commissions but requires more disclosure around charges from advisors.

“Client needs vary by their individual situations, and they tell us they want choice in how they pay for services.  We believe our advisors can most effectively uphold a fiduciary standard of care and work in clients’ best interests by continuing to offer choice,” said Shelley O’Connor and Andy Saperstein, co-heads of wealth management.  

The firm said clients who prefer transaction-based pricing will continue to have access to retirement brokerage accounts and receive advice that complies with the DOL fiduciary rule and Best Interest Contract Exemption. These accounts will offer a “broad product suite including mutual funds and exchange traded products (such as ETFs) amongst other products”.

Clients who prefer a fee-based retirement account will continue to have access to the firm’s investment advisory offerings.

As has been noted in the media and elsewhere, Morgan Stanley’s move contrasts with that of rival bank and wealth manager Bank of America. Earlier in October, BoA said it will get rid of IRAs that charge investors per transaction; instead, clients who want such an account must pay a fee calculated on a share of their assets.

(Editor's comment: While debate will continue on whether the fiduciary rule will drive real change in the industry, Morgan Stanley has perhaps been quite brave in saying that clients should have the freedom to decide for themselves how they want advisors to be paid. There may be a risk that in an understandable desire to root out biased and conflicted advice, regulators make the mistake of micro-managing clients' investment lives, with unintended consequences. The key word in this debate must be "transparency". So long as there is complete disclosure on how the menu option works, this will be an important step.)