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6 Things Financial Professionals Need to Know About Consolidation in the Wake of the DOL Fiduciary Rule

Terry Mullen
Dec 27, 2016

At first blush, it may seem that these changes would be no big deal. After all, you are an experienced professional, and you already put the best interests of every client first when making investment recommendations and choosing suitable mutual funds. But even though you are honest and transparent in all your dealings, the new Department of Labor fiduciary rule could affect every aspect of your operations, from how you compensate your best brokers and salespeople to how you prepare and maintain your client agreements and other paperwork.

 #1. It is Already Underway

You do not have to wait until April 2017 to see the impact the fiduciary rule is having. All you have to do is look around. A new report by Boston-based consulting firm Credit Associates found that smaller brokerage firms are expected to bear the brunt of the cost of implementing the fiduciary rule and that those smaller firms are least able to afford the price of compliance.

#2. It is Driven By a Higher Cost of Doing Business

The higher standards associated with the DOL fiduciary rule are expected to come with higher costs, and those costs will be proportionally higher for smaller firms. As a result, larger companies are already buying up their smaller competitors. Those newly-formed behemoths will likely benefit from economies of scale and become even more competitive as a result.

#3. The Consolidation Could End Up Hurting Consumers

The whole intent of the Department of Labor fiduciary rule was to protect consumers and help them avoid conflicts of interest with their brokers and financial advisors. The original goal of the fiduciary rule was to protect retirement funds from unsuitable investments, high fees, and other costs and allow them to maximize their earnings and enjoy a happier and more financially secure retirement.

#4. It Could Be a Benefit for Some Smaller Firms

While the wave of consolidation is expected to bring a lot of uncertainty, the news is not all bad. Some firms may see a benefit from the consolidation, especially owners whose companies become takeover targets for larger and better-capitalized brokerage firms. The owners of those practices could see high returns for all their hard work as the firms they worked so hard to build are bought up by eager suitors./p>

#5. It is Expected to Affect Insurance Professionals as Well

Financial advisors and stock brokers will not be the only ones impacted when the DOL fiduciary rule takes effect in April of 2017. Insurance companies and individual insurance agents will also be expected to abide by the stricter requirements of the new rule, and that could lead to a wave of consolidation in this market as well. From insurance agents going to work for large financial planning firms to revenue-sharing agreements between insurance companies and brokerage firms, the fiduciary rule will have a significant impact on the industry.

#6. Client Relationships Will Likely Be Affected

While industry consolidation is likely to have a profound impact on financial professionals, individual clients will be significantly affected as well. Perhaps the most noticeable change for consumers will be a shift in the way they get advice, education, and guidance. Once the Department of Labor fiduciary rule takes effect, brokers and other industry professionals will need to walk a fine line between educating their clients and providing investment advice. 

There is little doubt that the wave of financial industry consolidations and buyouts which are already underway will continue into the future. If anything, the rate at which existing firms merge and others go out of business is expected to accelerate once the Department of Labor fiduciary rule takes effect in April of 2017.

While much of the impact of the rule change has already been factored in, there are bound to be some surprises along the way. When those unexpected events take place, it could trigger an even bigger wave of financial industry consolidations. No matter where you fall in the financial planning spectrum, it is important to be aware of this move toward consolidation, and that you be aware of its potential implications.

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