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Will DOL Rule Fuel BD Mergers?

Just as the DOL’s 2012 fee disclosure regulations increased the movement toward greater fee transparency in DC plans, the DOL’s conflict-of-interest rule may increase broker-dealer mergers and the move toward more revenue from fee-based products by advisors.

AIG’s CEO said the pending conflict-of-interest rule was a factor in the firm’s decision to sell their 5,200-rep BD, according to a recent Investment News report. The buyer was Lightyear, which sold Cetera to RCS Capital two years ago. With backing from a Canadian pension manager, Lightyear is now looking at other acquisitions as scale becomes even more important.

Cambridge Investments estimates that they will have to spend as much as $17 million just to comply with the pending DOL rule.

But the issue raised by the DOL rule is most acute for insurance BDs that operate on thin margins and rely on the sale of proprietary products — which could be prohibited under the rule. Years ago, wire houses sold off their asset management divisions to avoid such conflicts, with Merrill Lynch selling to BlackRock and Smith Barney sending their asset management group to Legg Mason for their advisor group. The DOL rule could force insurance companies, as well as the few asset managers that still own significant BDs, to divest. Larger BDs seem ready to gobble up their smaller rivals, and PE firms might see opportunities for bigger deals as well.

In 2015, advisors generated more revenue from fees than from commissions for the first time ever, according to a report by CLS Investments. This jives with Cerulli data showing fee-based accounts tripling over the last 10 years. The DOL rule will only force that issue, with some BDs ready to adopt this change. Most advisors, however, will be hybrids and not yet ready to go 100% fee-based.

Providers and advisors are scrambling to figure out how the DOL’s pending rule will affect them, and plan sponsors are wondering whether the rule will have any immediate, material effect on them. But it’s the BDs that are likely to be the hardest hit, including those which are not prepared or not well-funded — and especially insurance BDs that rely on the sale of proprietary products.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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