M&A Opportunity Under a Trump Administration
Following nearly eight years of increased regulatory demand under the Obama administration, can the opposite ideology be expected from a President Trump?
As the industry anticipates the incoming Trump administration and the future regulatory landscape, Advisors Asset Management CEO Scott Colyer says that the likelihood of loosening regulatory reigns may free up spending previously directed toward compliance teams. Deals to grow compliance departments may be reworked, providing new discussion about M&A and how firms may look in the years ahead.
"The elevated cost of compliance over the last eight years has made it very difficult for the smaller guys," Colyer said, adding that without the costly practice, "potential layoffs may come" as a result.
Colyer says the new landscape will offer clients more deal-making opportunities.
"I think the most popular thing now is that if [your client is a] small RIA, there are services out that will broker deals, combine you with another one and create some sort of a buyout," he said. "I think those will continue to escalate because larger is always going to be better."
Colyer sat down for an interview with Money Management Executive last week. This is an edited version of the conversation.
How do you foresee a Trump administration impacting future M&A?
The last eight years have not been a cake walk. We almost blew up the world in 2008, and there's been a huge amount of regulation in the financial services business as a result. There has been a sea change as to who can do what business.
After Election Day we find that we are going to have less regulation, less taxes and probably a bunch of fiscal stimulus. It's probably good for our business, but this doesn't have anything to do with the outgoing administration. This has to do with eight years of ultra-low interest rates that has turned peoples' retirement plans south because they haven't made a return.
I don't see anything bad about what happened on Election Day, but as far as our business is concerned it might be a little volatile because of the things they've said that aren't making people calm.
Will there be any impact on a current industry trend toward passive?
I think the Department of Justice incensed advisers towards a fee-based platform with the rollout of the fiduciary rule. Passive is a lot cheaper than active, but I don't think you'll ever be without active managers. I know there has been a flood moving out of active, and it scares the heck out of active managers, but that's also because you have the spread of ETFs.
ETFs that were born in passive have matured and now there are now these actively managed ETFs. I would suggest that everybody begins to do the same thing in the market.
How will this impact industry consolidation?
Over the 30 years or so that I've been doing this, we've been in consolidation. Regulations like the fiduciary rule severely penalize firms that are transactional in nature, and we're not prepared for this. Now that doesn't include Merrill Lynch, Morgan Stanley or Wells Fargo, but it does include firms like Edward Jones, Ameriprise, LPL and then some of the independent brokerages. Some are farther along than others, and it's not that Edward Jones isn't going to do well.
“Everybody thinks fee-based is better for the client but a lot of clients don’t see it that way,” said Advisors Asset Management CEO Scott Colyer.
There is this assumption out there that everybody thinks fee-based is better for the client, but a lot of clients don't see it that way. I came out of the fixed-income world, and if you had a portfolio full of bonds, why pay someone 1%? I think there's a bit of a pushback there, but I do think that the fiduciary rule, if it stands, will accelerate the move to RIAs.
With the fiduciary rule possibly off the table, what can be expected for M&A?
It's hard to say because everybody has put a lot of work into it. Many have already made changes; advisers have made changes in their practice. Whether or not you have the fiduciary rule or not, the move toward fee-based has been going on for years. This just pushes it along a little bit.
You have some firms that have used the rule to completely get rid of transactional business in retirement accounts. They left their clients with no choice but to go to fee-based or to a discount brokerage. And it's not that the fiduciary rule is bad, it's just that when you start using the best interest contract exemption you open yourself up to all sorts of litigation.
One commitment from the Republican side of the House and the Senate is that they would like to stop this. There is already litigation from the industry to try and stop the rule. Trump has said a lot of things, and whether or not he can get them done in four years remains to be seen. But I think one of the important things they may try to address immediately is to either slow this thing down or stop it. Even the SEC doesn't like the rule, and that's because they're the major regulator throughout their careers and advisers hate the DOJ. The DOJ is stepping way out of bounds and the SEC wants to have their own fiduciary rule. I just think that limits peoples' choices. Firms will now have no interest in small accounts because it won't bring them money; therefore it leaves the smaller investors without advice.
Are managers now going to look toward partnerships for help?
The elevated cost of compliance over the last eight years alone has made it difficult for the smaller guys to earn money. There have been a few firms out there that have done rollups ... but it's an interesting thought to take a bunch of people that manage money well and put them together, and centralize the services they all need.
If you look at the Nuveen structure - they were recently sold to TIAA - their strategy back in the 1990s was to go out and buy boutique asset managers, to leave them independent so that they owned all of it, and gave their profits to management.
Their interests were aligned. So if you look at the suite that Nuveen has, they'll have the same back office, compliance and distribution needs. So if you can bring them all under one umbrella, that's one that's worked.
What killed Nuveen was they went through a leverage buyout of private equity and they had so much debt it almost crushed them. Now that TIAA owns them, I think you're going to find they have new life.
For advisers, I think the most popular think now is that if you're a small RIA, with a book of say $200 million, there are services out that will broker deals, combine you with another one and create some sort of a buyout.
Those will continue to escalate because larger is always better.
Is 2017 business as usual for AAM as a result of the election?
No. Prospects for the industry got a lot better. During the previous seven years, it was feet down regulation.
Compliance departments became the fastest growing of the firm. Now potential layoffs may come.
Under the Obama administration, there was always the promise of more regulation rather than less, and none of that's bad, it just drives up the cost. But it's not going to change our model. We'll continue to be to partner with high quality firms.
For us to spend our time developing products and distribution for an asset manager ... it will make it easier to grow our business instead of investing in another compliance guy or another piece of software, and that's the problem.
The expanse of expense was really in places where we wanted to invest and baton down the hatches with what you had.
I think it's excited to think about, but I am kind of a show me kind of guy. Let's see what [Trump] does.
He has a lot of people that are thinking he is going to do a lot of things, but I also haven't met a politician yet that could fulfill most of their promises.