What’s the latest news in the world of regulatory compliance? Welcome to our biweekly recap, where we are giving you our report highlighting the top compliance news articles from various industry news publications. We have selected the most relevant and important news articles related to registered investment adviser (RIA) compliance and regulatory issues. Today’s recap focuses on a ruling from the DOL, generative AI, succession planning for RIAs, and M&A within the industry.
Here are our top investment adviser compliance articles as of January 26, 2024:
DOL: Contrary to warnings, contractor rule won’t undermine independent advisors (Author – Dan Shaw, Financial Planning)
The Department of Labor (DOL) has finalized a rule on independent contractors, intending to clarify distinctions between contractors and employees. The DOL contends that fears among Registered Investment Advisers (RIAs) about the rule threatening their business model are exaggerated. However, the Financial Services Institute (FSI) argues the new interpretation could undermine the independent contractor status of many in the advisory industry. The rule, effective from March 11, replaces Trump-era guidelines and employs a six-point test assessing the “totality of circumstances” in determining employment status. Industry experts anticipate potential litigation, expressing concerns about increased ambiguity and complexity in the employment landscape.
Don’t fear the robots: the case for deploying AI in wealth management (Author – Tobias Salinger, Financial Planning)
Wealth management firms are rapidly embracing artificial intelligence (AI), particularly large language models (LLMs), as they seek to enhance client experiences and increase adviser productivity. AI technologies, exemplified by OpenAI’s ChatGPT, automate manual tasks, provide scalability for serving more customers simultaneously, and help identify leads for long-term client relationships. Industry experts suggest viewing AI as a historic opportunity rather than a threat, with potential benefits including improved client experiences, increased adviser efficiency, and growth-related tasks. Wealth management firms are already integrating AI tools, signaling a transformative shift in the industry’s approach to client engagement and operational efficiency.
Advisor M&A Fell in 2023: Why DeVoe Says It’s No Big Deal (Author – Victoria Zhuang, ThinkAdvisor)
In 2023, mergers and acquisitions (M&A) in the RIA sector saw a year-over-year decline for the first time in a decade, primarily attributed to higher interest rates. However, the overall M&A market remained active, with 66 deals closing in the fourth quarter, marking an 8% increase from the previous year. The total number of deal closings for the year decreased by 5% to 251. Factors contributing to the slowdown included interest rates, extended due-diligence processes, evolving deal structures, and a focus on the true value of a buyer’s equity. Younger advisers face challenges in affording to buy firms internally, leading to increased opportunities for external buyers. Small RIAs with $100 million to $500 million in assets were the most favored targets, accounting for 50% of deals.
6 Mistakes RIAs Make With Succession Planning (Author – Richard Chen. ThinkAdvisor)
In succession planning for RIAs, six common mistakes can have detrimental effects, emphasizing the need for careful implementation. The first is procrastination, as delaying planning may lead to rushed decisions and employee departures. Failing to involve employees early in the process is another pitfall, hindering the preparation of the next generation and potentially causing client attrition. Timely client communication is crucial, and a lack of sufficient documentation, including legal terms, may lead to confusion. Retaining experienced advisers is essential to avoid legal and financial liabilities. Lastly, planning should anticipate contingencies, ensuring flexibility and periodic plan reassessment.
RIA M&A is here for the longer term, says Fidelity (Author – Steve Randall, Investment News)
The article discusses the outlook for RIA mergers and acquisitions (M&A) based on insights from Fidelity. Fidelity suggests that RIA M&A activity is expected to continue in the longer term, dispelling concerns of a temporary trend. Despite a decline in RIA M&A deals in 2023, Fidelity highlights ongoing interest from buyers and sellers. The firm notes that a shift towards larger deals has been observed, with a focus on strategic combinations. Fidelity emphasizes the importance of adaptability and leveraging technology for RIAs to navigate the evolving landscape of M&A opportunities effectively.
Check out our previous round up, which focused on the SEC’s spot bitcoin ETF approval, updates from the DOL, advisers’ opinion on AI, and the impact of SEC cybersecurity rules.