The Department of Labor’s new conflict-of-interest rule will have a huge effect on advisors and asset managers. And among those to be most severely hit are boutique broker-dealers.
So concludes Cerulli Associates, a Boston-based research and consulting company, in a new report, “U.S. Broker/Dealer Marketplace 2016: Retooling for a New Competitive Landscape.”
Examining broker-dealers with financial advisors serving retail investors, the study offers a 10-year forecast of broker-dealers channels, including their market sizing, strategic directions, challenges and opportunities.
According to Cerulli, small broker-dealers face the greatest financial risk under the Labor Department fiduciary rule. Unable to bear the new rule’s increased compliance costs, many will seek to merge with larger companies that enjoy economies of scale.
The result will be a further consolidation of assets under management. Broker-dealers with less than $10 billion in assets under management, Cerulli reports, account for more than 80 percent of broker-dealer sales volume, but less than 10 percent of advisor-managed assets.
“It is likely that some of these boutique firms will be unable to support new regulatory costs, resulting in an increase in firm consolidations,” says Cerulli Associate Director Kenton Shirk in a news release. “Smaller broker-dealers may be acquired by larger ones, or choose to combine operations, or affiliate as an office of supervisory jurisdiction with an independent firm to realize cost synergies.”
Reducing costs and business risks, and the more efficient use of time and resources, remain advisors’ chief areas of focus as they prepare for implementation of the Labor Department’s fiduciary rule, to be phased in between April 10, 2017, and Jan. 1, 2018. To meet these objectives, most broker-dealer-affiliated advisors Cerulli surveyed said they plan to adopt productivity-enhancing technologies. Many also plan to shift their compensation structures from commission-only to commission-plus-fees or fee-only revenue, as the rule favors fee-based practices.
For many, the greater focus initially will be on cost reduction. The reason: Migrating from commissions to fees, without negatively affecting company revenue, is a longer-term project.
“As technology use continues to shape the advisor landscape, it is becoming a significant factor for advisors choosing a new (broker-dealer),” says Shirk. “Advisors recognize its large impact on productivity and client experience, and (broker-dealers) should make technology a strategic priority.