Assuming the DOL’s fiduciary rule goes into effect, it could well accelerate the trend toward consolidation as small brokerage firms with strong sales cultures and questionable compliance staffs face potential litigation if they want to continue to do business as usual.
What could derail the DOL rule at this point? Many experts say nothing.
Others think an outlier scenario might materialize if numerous broker-dealers start booting millions of small investors out the door and leave them with orphaned accounts. Conceivably, that could prompt regulators to delay the rule further or dilute it to the point that it lacks meaning.
But those odds look slim. A report from the U.S. Chamber of Commerce says as many as seven million owners of retirement accounts could lose access to advice completely. It cites a survey finding that 71 percent of advisors claiming they will stop providing advice to at least some account holders.
However, one reason that the Department Of Labor’s fiduciary rule is likely to become the law of the land is that big brokerage firms have invested millions to comply with the rule and now view their investments as sunk costs that give them major competitive advantages. Many think that most wirehouses would have supported the DOL rule at the outset were it not for the use of class action lawsuits as a forum for dispute resolution.
Following the election of President Trump last November, many big brokerages were of two minds. While the big boys generally applauded his deregulatory agenda, they thought that if the rule were jettisoned a playing field that was tilting in their direction might be leveled again.
Some small brokerages would like to cash out and sell their firms but with the business in such a state of flux, they might not receive attractive offers. Another option for these firms is to convert to super-OSJ hybrids and affiliate with one of the largest independent broker-dealers. Super-OSJ firms like Private Advisor Group, an LPL office in Morristown, N.J., are already bigger than many B-Ds.
This option has several advantages, not the least of which is that CEOs of small B-Ds can keep their jobs. They can also sell the plan to reps as a “transition plan in a box” or a path to enhanced security without the rep having to engage in all the paper work on their own.
However, if a small brokerage firm still operating with a strong sales culture while living in a world of disbelief thinks it can do business as usual it could ultimately face litigation problems, according to Duane Thompson, a senior policy analyst at Fi 360. “If firms don’t adopt a fiduciary culture and continue to base everything on production numbers, they are going to get into trouble,” he adds.
That prospect, in turn, could prompt big brokerage firms to opt to cherry-pick individual reps at these firms who accept a standard of client loyalty, duty and care. Several big IBDs that prepared to the rule reportedly are already experiencing excellent recruiting results, so they may see little need to acquire small firms that bet the rule would die on the D.C. vine.