With less than 6 months until firms need to meet requirements for the DOL rule, the number of impacts continues to grow – this time, M&A is predicted to increase as a result of firms accommodating the ruling.
One sign of the trend is the number and type of recent high profile deals, including the recent acquisition of AIG’s Advisor Group Unit by Lightyear Capital and Nationwide’s acquisition of Jefferson National. In both cases, the buyers specifically cited the DOL rule as the driving reason for the acquisitions.
Another sign is industry leaders’ predictions and analysis. At the recent Deals and Deal Makers Summit, put on by leading investment bank ECHELON Partners, a seminal debate between ECHELON CEO Dan Seivert and Pershing Advisor Services CEO Mark Tibergien was held to highlight the potential impacts to mergers and acquisitions in wealth management based on the outcomes of the new DOL rule.
Seivert presented research and analysis from his firm that shows that approximately $3.1 trillion of client assets representing $18.5 billion in revenue will be impacted at broker-dealer firms.
The “prohibited” transaction revenue based on being in non-compliance with the DOL’s rules from this is estimated to be approximately 10-14% of current revenues or roughly $2 – $2.5 billion.
While discount brokerages, robo advisors, and independent RIAs will likely benefit from this rule, the older, incumbent brokerage firms will likely be hurt in five ways, according to Seivert:
1. Elimination of revenues from disallowed products
2. Movement to lower-revenue products
3. Increased expenses to educate staff
4. Necessity to modify processes and upgrade technology
5. Increased costs for insurance and supervision, and higher penalties for non-compliance
The broker-dealer industry already carries historically smaller margins. These cost increases and revenue decreases may potentially create difficult choices for some B/Ds: seek outside investors to stay afloat, merge their businesses with another B/D or simply put themselves up for sale.
This “consolidation” trend prediction, therefore could result in a “swarm” of activity from savvy buyers to pick these firms up on the cheap, re-structure them, transition from commissions to fees, deploy technology and then benefit from a higher valuation once the regulatory waters settle in a few years.
There are naysayers, however. Those thinking that deal making will slow down as a result of the DOL rule point to the fact that there are very real risks involved in acquiring broker-dealer businesses, given their declining economics and valuations in a post-DOL world. Further, legacy firms may tend to wait it out on the sidelines and take the minimum steps necessary to right size their businesses, rather than sell at the bottom. Many of these firms have been around for decades, are family owned and thus are in it for the long run.
Ultimately, M&A activity will all come down to the ability of firms to reinvent themselves or not, Tibergien and Seivert agreed.
They also agreed there will be an opportunistic plethora of service and technology firms offering solutions, technology, and other systems to deploy to manage compliance risks, further encouraging legacy firms to either stick it out on their own and invest in new technology or become sellers to larger firms who possess these systems to better enhance their future opportunities.
Bottom line here is that technology – whether you have it or not – will be the driver for many deals because of DOL.