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Is Your Firm a Takeover Target?

Terry Mullen
Dec 26, 2016

How the DOL Fiduciary Rule is Driving Consolidation and Shaking Up the Status Quo

Even the most well-intentioned laws can have unexpected consequences, and that certainly seems to be the case with the soon-to-be-enacted Department of Labor fiduciary rule. That rule, intended to help financial planning clients avoid conflicts of interest and get impartial advice for their retirement funds, is already driving a wave of consolidation and closures throughout the financial planning industry.

If you work in the financial planning industry, either as an independent financial advisor, a wealth manager or as part of a large firm, you could find yourself the target of a takeover. The wave of consolidations and closures is already underway, and the new DOL fiduciary rule is not even in effect yet. Common sense dictates that the consolidation wave will continue, or even escalate, once April 10, 2017, rolls around and the new fiduciary rule formally takes effect.

The risks associated with the upcoming Department of Labor fiduciary rule are expected to be particularly acute for smaller brokerage firms and independent financial planners. It is easy to see why that would be the case, but that does not make implementation of the fiduciary rule any easier for those small firms and independent operators.

While large brokerage firms and mutual fund companies have teams of lawyers and industry experts at their disposal, smaller firms do not enjoy such a luxury. While the biggest brokerage firms and mutual fund companies have been busy preparing for the change for some time now, many smaller companies and independent financial planning professionals were caught off guard by the fiduciary rule. 

Some financial professionals did not think that the fiduciary rule would apply to them. They assumed that since they already put the best interests of their clients first, they would not be affected by the changes the U.S. Department of Labor were proposing. They thought that it was safe to ignore the rule and carry on with business as usual. 

Now that the DOL fiduciary rule changes are almost here, many of those independent professionals and small brokerage firms are finding out that the changes will affect them, from the products they offer their clients to the paperwork they are expected to maintain and provide. 

At its worst, that lack of preparedness could cause those firms to close, or those independent financial planners to close up shop and seek employment in the large firms that are better prepared for the dictates of the Department of Labor. In other cases, firms and individuals who are ill-prepared for the changes may become takeover targets themselves, as big brokerage firms work to get even bigger, taking advantage of the economies of scale, and taking advantage of the possibilities the new fiduciary rule provides.

There is ample anecdotal evidence that the wave of closures and consolidations is solidly underway, and that it has been going on for quite some time. But not all of the evidence is anecdotal, and there are now some real-world studies to back up what those in the financial planning industry have been seeing.

Case in point is a new report by research and consulting group Credit Associates. This Boston-based research firm took an in-depth look at the financial planning industry as it stands today, and at the impact, the upcoming Department of Labor fiduciary rule changes are likely to have on small brokerage firms, large brokerage firms and mutual fund companies and independent financial advisors.

The intent of the new Department of Labor fiduciary rule are certainly admirable, and studies show that some level of consumer protections was long overdue. Even though the vast majority of independent financial advisors and financial planning firms are open and honest, this industry has always attracted its share of shady operators. It is those shady operators who ruined things for everyone else, and the upcoming DOL fiduciary rule is the result.

As with every well-meaning piece of legislation, the unintended consequences of the DOL fiduciary rule were not evident in the beginning. The drafters of the upcoming rule no doubt felt the new stricter disclosure requirements and conflict of interest restrictions would help consumers, and no doubt they will.

At the same time, the drafters of the new rule probably did not envision the significant burden the heightened standards would have on smaller brokerage firms and independent operators. They may have miscalculated the amount of money it would take those smaller firms to comply with the DOL fiduciary rule, or they may not have understood the truly full nature of the changes its many provisions would create. Maybe they did not realize just how complicated the fiduciary rule would be, or how much time it would take firms of all sizes to comply with the new restrictions. 

No matter what the reason, it is now clear that larger and more well-financed firms will have a distinct advantage once April 10, 2017, rolls around and the new DOL fiduciary rule takes effect. Those larger firms, with their legions of attorneys and other experts, will have a much easier time navigating the complexity of the ruling and complying with its many restrictions.

The built-in advantage those larger firms will have should become even more apparent by this time next year. By then, the first wave of closures and consolidations may well be completed, but there will surely be more to come.

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