Every RIA’s worst nightmare looks likely to become true in the very near future. In what can only be described as paradoxical, DOL chief Acosta announced this week that despite the long-term delay of the fiduciary rule and its overall uncertain fate, the DOL would begin enforcing it. While Acosta conceded that the main enforcement mechanism of the rule—lawsuits—are not available for clients at the moment, he said the DOL would go after firms which are willfully violating the rule.
FINSUM: Okay so bad behavior is one thing, but where does the line get drawn on this. Many firms could surely be forgiven at this point for halting their fiduciary rule prep, yet now the DOL seems to be acting like all is moving ahead as normal. This whole process has seen astonishingly poor management.
Barron’s has run a rather obtuse article in which it tells advisors who might be seeking a sale of their firm to make sure to focus on building aspects of their business which would be valuable for acquisition (who isn’t focused on building value?). However, it does point out that the key perspective in building value for the sale of an RIA should be “new clients plus flows from existing clients less attrition, is what you should really be focusing on”. Profit rate and revenue growth are the big valuation drivers for RIAs.
FINSUM: We don’t like that this article is so dismissive of RIAs’ business sense in terms of creating value, but some of the points it makes are clear and good to keep in mind.
There has been a lot of hope lately about the likelihood for the SEC to take control over the fiduciary rule and craft a comprehensive new regulation. However, the odds of the SEC doing so look increasingly long. The agency itself has made several distancing comments lately, such as SEC chief Jay Clayton admitting there was “no silver bullet” for a new rule. Not only does the SEC have the big challenge of harmonizing a fiduciary rule across all types of accounts, but it is facing a fierce and divisive political climate. Many states are already crafting their own fiduciary rules, another factor the SEC must overcome as it needs to appease all the states. There is also internal division within the SEC, as some commissioners are against the crafting of a new fiduciary rule, while others are for it.
FINSUM: On top of all these headwinds, there is also the constant barrage of lawsuits which will try to stop the SEC at every turn. We think it will take several years for the SEC to make a rule, if it ever even gets there. That means we will either need to live with the DOL fiduciary rule, or it will be tossed out once and for all.
If you are thinking of selling your brokerage, you are in for bad news. Right now, brokerage firms are getting between 0.7x to 1x the past year’s revenues as a purchase price, while advisory firms are getting from 1.5x to 2.5x. The explanation for the very weak valuations is that brokerages don’t have any fiduciary rule experience, which greatly lowers their value versus advisory firms, which have acted as fiduciaries all along. Additionally, commissioned-based revenues, which are the norm for brokerages, are considered less “sticky”.
FINSUM: It is a terrible time to be trying to sell a brokerage. On top of all the factors mentioned, the other major one pulling down valuations is uncertainty. Wealth management is currently fraught with unknowns surrounding technology and regulation, which is also hurting prices.
The wealth management industry is in flux. Aside from the fiduciary rule debacle, Morgan Stanley has just removed itself from the longstanding broker protocol. Now, Merrill Lynch has debuted a new incentive program. Merrill’s new program offers bonuses which allow total pay to rise 2% if all targets are hit. For instance, for 2018, a broker would need to grow the amount of net new assets brought in by 5% and add at least five new affluent clients or two new UHNW clients. The big change to the plan is that Merrill will no longer penalize brokers who don’t meet the targets, but will instead pay extra to those who do.
FINSUM: This seems a positive shift, but we do not have enough insight at this time to make a full comment on the changes.
The last couple of weeks has seen some tumultuous statements out of the SEC. We became worried last week when two new appointees to key SEC positions did not say the fiduciary rule was on the regulator’s priority list. However, SEC chief Clayton has restated his plans to create a universal fiduciary rule. That said, he characterized creating one as a “herculean task”, acknowledging the difficulty in creating such a rule. Amidst all this back and forth, he has given away what could be considered a “hint” that industry might like the forthcoming rule. He has been adamant about preserving investor choice, which is taken to mean that the SEC may favor a less-restrictive disclosure-based rule.
FINSUM: We suspect the SEC will eventually come up with a universal fiduciary framework, and we likewise believe it will be both effective and disclosure-based.