Tags: M&A

It seems that every new industry regulation engenders a strong reaction among the major players in the industry who are impacted. Nowhere is that fact more in evidence than the financial services arena, where a new Department of Labor rule is sparking a wave of consolidations, closures, mergers, and acquisitions.

 The regulation in question is the Department of Labor fiduciary rule, and it extends fiduciary responsibility to brokers, dealers, financial advisors, wealth managers and other financial professionals who work with clients and their retirement savings.

For now, the extension of the fiduciary rule applies only to retirement plans like IRA accounts, but future changes could enhance consumer protections even further. No matter what the future holds, it is already clear that the biggest players in the financial services industry are not waiting around to see what happens. They are taking action and doing so in a big way. 

There is a reason to believe that the recently announced merger of Scottrade and TD Ameritrade is just the latest, and so far one of the biggest, in an ongoing wave of mergers and acquisitions related to the upcoming implementation of the DOL fiduciary rule. While there are no doubt other factors at play, it is safe to assume the decision makers at both companies had the fiduciary rule in mind when they drew up the terms of their partnership. 

In the end, both Scottrade and TD Ameritrade stand to gain from the merger, but in very different ways. One of the biggest benefits for Scottrade is directly related to the implementation of the Department of Labor fiduciary rule, in particular, the liability issues the new regulation raises. Litigation is always a risk in a volatile industry like finance, and many fear that the new DOL fiduciary rule could open the floodgates and invite lawsuits from investors who are displeased with their results and the performance of their retirement funds.

By teaming up with a larger firm like TD Ameritrade, Scottrade can spread out its risk of legal liability, giving the company the protection it needs in a post fiduciary rule world. As with other such laws, the impending implementation of the Department of Labor fiduciary rule is likely to create all manner of unintended consequences, and an increase in legal liability is at the forefront of those unknown risks.

Scottrade is not the only winner in the merger, however, and there is plenty for TD Ameritrade to like as well. Like Scottrade, TD Ameritrade certainly had the upcoming Department of Labor fiduciary rules in mind when they negotiated and approved the merger, and like Scottrade, TD Ameritrade stands to benefit from the new partnership. 

One of the biggest benefits TD Ameritrade is expected to gain is an increased retail presence. While a growing number of employees are entirely comfortable with the online-only investment experience, many investors still prefer to get at least some of their investment advice face to face.

By teaming up with Scottrade, TD Ameritrade gains access to a vast network of existing local offices, allowing the primarily online investment firm to make a big push into the retail space - without the high cost of real estate acquisition and building from the ground up.

By the time the merger is complete, TD Ameritrade will have access to Scottrade's network of more than 500 brick-and-mortar retail locations, as well as its more than 1,000 full-time investment consultants. At the same time, the new DOL fiduciary rule governing the conduct and investment offerings of those brokers will have already gone into effect, reducing the uncertainty surrounding the upcoming regulations and giving both companies more clarity.

The merger between TD Ameritrade and Scottrade will benefit both companies, but customers stand to gain as well. Clients of both firms will likely benefit from a consolidation of their accounts, as well as lower costs and a wider universe of investments to choose from.

The merger deal should increase the number of RIAs and make it easier for the combined firm to coordinate training and monitor compliance with the new DOL fiduciary rule. Scottrade currently employs some 800 RIAs, while its larger merger partner has 5,000 RIAs on staff. In the end, the combined company could provide jobs for nearly 6,000 RIAs, and the combined resources of the two firms should simplify the training and compliance process enormously.

By now it should be clear that the wave of consolidations, mergers, and acquisitions related to the upcoming Department of Labor fiduciary rule is just getting started. By the time the new rule takes effect in April of 2017, it is safe to assume even more firms will have announced mergers and other strategic partnerships. The marriage of TD Ameritrade and Scottrade may be one of the largest examples of fiduciary rule consolidation, but it will certainly not be the last.

More articles related to: M&A

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Disclaimer

The above article is meant for information purposes only and is not intended in any way to provide legal or other advice for any specific situation.  Readers always should consult their own tax, accounting and legal advisors before taking any action related to the above article or subject matter.

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