Thought Leadership in Action

The past few years have been a whirl for advisors at smaller broker-dealers. Consolidation in the industry is rampant — last year’s 138 mergers and acquisitions were a record, according to Echelon Partners, and were a 10 percent increase compared with 2015, which had also been a record year.

“For owners of smaller broker-dealers, it provides a great opportunity to sell a business and earn an exit payout,” says Evan Tarver, investments editor at FitSmallBusiness.com, a New York City-based business service that provides advice to small businesses. “For the advisers employed by these broker-dealers, it might be negative as they may be losing their jobs."

Here’s the latest on M&As among broker-dealers.

What’s Inspiring These Acquisitions?

In many cases, the U.S. Labor Department’s proposed fiduciary rule and the corresponding increased cost of doing business has been inspiring smaller and independent broker-dealers to look for other options, experts say. While parts of the rule went into effect in June, it’s been under fire from Congress and from industry groups, and is subject to a delay by the Labor Department.

Broker-dealers worry that the “best-interest contract” exemption raises liability for them. Other challenges that have affected smaller broker-dealers’ bottom lines include low-interest rates, which make it difficult to turn a profit, and new regulations regarding certain commission products. Finally, smaller broker-dealers find it difficult to keep up with the technology necessary to compete with larger broker-dealers.

What’s In It for Both Sides?

Larger broker-dealers that want to continue growing often see acquisitions as an easy way to do so, experts say.

There are two ways to grow, says Daniel Wachtel, global director at Harbour Capital Partners, a business advisory firm in New York City. The first is to hire a lot of college graduates and pay them to study for their licenses, only for them to be let go because they fail the test or don’t hit high sales goals, he says. This can set up a “revolving door,” he says, which makes it difficult to establish a stable team of advisers that can provide a high level of customer service and grow portfolios effectively. “The second way is to ‘buy’ advisers from competitors,” he says, which requires paying out for a client book. “Buying small firms means they aren’t paying each adviser a large payout for their client book from another broker-dealer, hoping they have a high client retention rate and that there is no lawsuit for leaving,” Wachtel says.

What’s Next?

For now, employees at broker-dealers can expect uncertainty, while it remains to be seen how these actions might affect costs for consumers. “Consolidation among broker-dealers can either result in low-cost leaders and a ubiquitous price for broker-dealers, or costs that represent monopolies or oligopolies,” Tarver says. “This means that the consumer might benefit from consolidation but that it's still not clear.” In the meantime, further clarification of the fiduciary rule could also dial back some mergers and acquisitions as well.