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Practice Tips and Advice for Advisory Firms Dealing With DOL Related M&A

Terry Mullen
Dec 29, 2016

By now you are no doubt aware of the upcoming Department of Labor fiduciary rule, a change that will require brokers, advisors, and other financial industry professionals to follow fiduciary guidelines and meet stricter standards when working with clients and their retirement funds.

You have probably already started working on the changes you will need to implement to stay compliant with this new rule, which requires financial professionals to place the best interests of their clients ahead of their own when making retirement plan recommendations and giving investment advice.

What you may not realize is that the implications of the upcoming DOL fiduciary rule are expected to affect much more than your relationship with your clients. The increased costs of doing business this new law is anticipated to bring are already fueling a wave of consolidations and other changes in the financial planning industry, and if you are part of that world you could be impacted as well.

According to Paul Tally, the current president of consulting firm Gladstone Industry, merger conversions among broker-dealers are already up some 20% over the previous year, and many companies have cited the new DOL fiduciary rule as a contributing factor in their merger decisions. That deal-making is likely to continue, and even accelerate, as the fiduciary rule draws near. More and more firms are taking a hard look at just how much complying with the new law will cost, and that may lead many to look for strategic partnerships, buyout opportunities and potential mergers with other firms.

Of particular concern is the cost of liability and compliance with the upcoming Department of Labor fiduciary rule. While the aim of the new rule is certainly laudable, its drafters may have underestimated the cost of compliance, and the profound impact the increased cost of doing business would have going forward.

If you are an independent financial advisor or the owner of a small brokerage firm or wealth management company, there are things you can do to prepare not only for the implementation of the DOL fiduciary rule and the expected wave of mergers and acquisitions. 

For starters, you can review your current client practices and assess the scope of the changes you will have to make on April 10, 2017. If you are lucky, you may find that you have less to do than you think and that your firm is already largely compliant with the new industry regulations.

Fee-only financial advisors, in particular, may be less impacted by the Department of Labor and its new fiduciary rule. That is because the majority of fee-only advisors already take a fiduciary interest in their clients and their accounts, not only retirement accounts but personal funds as well.

For the rest of the financial industry, assessing the cost of compliance and the value of strategic partnerships may be harder to quantify. Working with your current attorney or accountant can be a big help, as can consulting industry experts who have an in-depth familiarity with the new DOL fiduciary rule and its far-reaching implications. The more you know about the new law before it takes effect, the better you will be able to weather the storms once its impact starts to become apparent. 

If you think that your firm may become a takeover target in the future, now is a good time to conduct a thorough evaluation and establish a fair market value for the company. Even if you are not thinking about selling out or merging with a larger partner, it is a good idea to be prepared.

As the wave of financial industry consolidations and mergers continues, more and more firms will be looking for merger targets and strategic partnerships. That could make smaller practices prime takeover possibilities, and the last thing you want is to be taken by surprise.

Keeping abreast of the companies that are merging and how they are teaming up to create strategic partnerships is another smart thing you can do to prepare for the implementation of the new Department of Labor fiduciary rule and its potential aftermath. As the owner of a small financial firm, it is a problem when your larger competitors merge and become even bigger. Those economies of scale can lower the cost of operations and make your competition even more formidable. Advance knowledge of those movements gives you more time to react and get ready.

In addition to valuing your firm and keeping an eye on your competitors, there are other things you can do to prepare for, and even benefit from, the current wave of financial industry consolidation and merger activity. As broker-dealers and registered investment advisors get ready for the new fiduciary rule by growing ever larger, you can focus on serving your clients and providing a more personal touch.

It is a strange form of irony that a law intended to help consumers could end up hurting them in the end. As large brokerage firms grow ever bigger and industry leaders merge with one another and scoop up their smaller competitors, the number of truly independent operators is expected to grow ever smaller. The owners of firms that provide personal service, impartial investment advice, and quality investor education will be in demand like never before, and that could be good news for you and your firm.

The value of personal attention has never been greater, and that will become even more real as the wave of mergers and acquisitions within the financial services industry gets underway in earnest. As a working professional in the financial sector, you should expect to see more firms merge and grow ever bigger, creating new and exciting opportunities for smaller practices with a strong focus on client success and education.

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