DOL fiduciary rule could spark acquisitions of RIAs as well as broker-dealers

Already expected to spur consolidation among broker-dealers, the DOL fiduciary rule could also hasten RIA mergers.

The DOL fiduciary rule, already expected to spur consolidation in the broker-deal industry, could also hasten mergers in the registered investment adviser space.

“Our merger conversations are up 20% over last year” and the Labor Department’s fiduciary rule is a big part of those discussions, said Paul Lally, president of Gladstone Associates, a consulting firm that specializes in mergers and acquisitions for RIAs.

The new regulation, which requires all financial advisers to put clients’ best interests before their own when helping them with their retirement accounts, has already spurred deal-making in the broker-dealer industry where firms have been concerned about the cost of liability and compliance.

Now the April 6 release of the regulation is rippling into the RIA market, a segment of the financial advice industry where a lighter impact was expected because it’s already held to a best-interests standard when making any investment recommendations. Still, RIAs have to ensure they’re in compliance with the regulation laid out in more than 1,000 pages.

(More coverage: The DOL fiduciary rule from every angle)

“SCALE MATTERS”

That takes time to digest. Add in the cost of implementation and that may be more than some smaller firm owners care to take on alone, according to David Canter, the head of practice management at Fidelity Clearing & Custody Solutions.

The implications may vary in nuanced ways between RIAs and broker-dealers, but all will need to understand and comply with the DOL rule, said Mr. Canter, who sees mergers giving smaller firms the scale they need to mitigate back-office costs.

“It’s increasingly become a business where scale matters,” he said. “It can help you compete in the marketplace.”

“There’s too much complexity” in the regulatory environment for owners who lack the bandwidth to analyze it as closely as they’d like or the deep pockets to invest in compliance, Mr. Lally said.

Firms with less than $1 billion of assets are “under the most stress” as economies of scale have not yet been reached, he explained.

RECORD DEALS IN 2015

The RIA industry saw an unprecedented 123 acquisitions last year, exceeding by 37% the previous record set in 2014, according to a February report from consulting firm DeVoe & Co. Wealth managers will keep coming up for sale as their founders near retirement and as others seek scale to reduce costs, according to the report.

Fidelity counted 138 deals among wealth management firms last year, representing almost $145 billion in assets, according to a research report it released this month. The report, which looked at mergers involving RIAs and assets of $100 million to $20 billion, found that California, Pennsylvania, New York, Illinois and Maryland were the states that saw the most deals, capturing about 45% of the activity.

So-called “strategic acquirers,” such as private-equity firms or wealth management firms with private-equity or venture-capital backing that have been building large networks of RIAs, were the largest group of buyers last year, according to Fidelity. They were buyers in about 49% of the deals, followed by RIAs at about 36%.

Private-equity firms and the fiduciary rule also have played roles in M&A activity among broker-dealers.

AIG, METLIFE

In January, American International Group Inc. CEO Peter Hancock cited the regulation as part of the insurer’s decision to sell its brokerage unit to private-equity firm Lightyear Capital and Canadian pension manager PSP Investments. A second major insurance company, MetLife Inc., said in February that it was exiting the brokerage business by selling its U.S. adviser unit to Massachusetts Mutual Life Insurance Co.

And just this month, two days before the final rule was released, insurance broker and consultant NFP Corp. said it was selling a majority stake in its independent broker-dealer, NFP Advisor Services, to private-equity firm Stone Point Capital.

While MetLife had been looking to slim down as it fought its too-big-to-fail label from the government, CEO Steve Kandarian noted during an earnings call last year that the proposed fiduciary rule was problematic for annuities. For MassMutual, the purchase meant DOL-related regulatory costs could be spread over a much larger pool of advisers, Michael Fanning, executive vice president of MassMutual’s U.S. Insurance Group, said in a February phone interview.