Financial advisors may wear two fiduciary hats. One to their clients concerning the advice and planning they provide. The second fiduciary hat may be to their businesses, more specifically to its creditors and investors. The predominant rule in Delaware is the business judgment rule – so called because courts will defer to the decision-making process of the directors of a business. But that isn’t without limits.
The volume of mergers and acquisitions in 2021 shattered almost every record possible. The total deal volume was the highest it has been since, well, ever. Nearly $5.8 trillion in deals were recorded globally just in 2021. That includes massive investments like the $200 million from Binance, a cryptocurrency exchange in media company Forbes. It also involved a sizable number of large deals in the financial investment industry, including a $800 million deal from Philadelphia RIA to acquire Asset Planning Services. Other financial industry deals involved movement from powerhouses like Morgan Stanley to LPL Financial or to start their own groups at Tesar Group Investment & Financial Planning (with $260 M AUM). It also involved departures from UBS for Linsco (where they’ll be joined by other Morgan Stanley departures). Other major mergers may have consolidated client assets into the hands of a few advisors, like Mercer Advisors acquiring Convergent Wealth Management. While RIA acquisitions may be slowing in 2022 after the unusual heat of 2021, the proliferation of them may have some advisor groups wondering if merging may be worth thinking about. As one legal advisor noted, directors of successful companies tend to strike while the iron is hot when considering mergers (or acquisitions) and may overlook a few crucial details. When considering any major business move you should always consult with your tax, compliance, and legal advisors. While you await their calls, here are a few things to think about when thinking about mergers.
Financial advisors may wear two fiduciary hats. One to their clients concerning the advice and planning they provide. The second fiduciary hat may be to their businesses, more specifically to its creditors and investors. This is especially true if the financial advisor is a director of the company. Many states follow the Delaware business rule concerning what a director’s responsibilities are concerning major events, like considering a merger or acquisition. The predominant rule in Delaware is the business judgment rule – so called because courts will defer to the decision-making process of the directors of a business. But that isn’t without limits.
The fiduciary duties of a director of the business include the same duties an advisor owes his clients, including loyalty, prudence, and due care. One of the key parts of the duty of care involves the duty of deliberation. So, when considering a merger (or acquisition), an advisor in a director role may want to consider how they think about the merger, including how often they met with the other directors or the board, how long the board had to consider the options before them, and what materials they had before them when making decisions. Directors, in some circumstances, may also have to show that they acted in good faith and that the transaction they considered was done with inherent fairness.
Financial advisory mergers may also bring up a host of regulatory concerns. Among them may be what FINRA and the various agencies may ask of them concerning a merger. FINRA states that they “encourage firms and in some cases require them” to notify FINRA at the planning stage of any major change so that they can discuss any proposals ahead of implementing them. The advance notice includes not only mergers and acquisitions, but also registered advisors who bring customer assets along with them when moving from one firm to another. This may include considering each group’s policies and procedures so that they are fully in alignment post-merger.
Yes, but there is one final fiduciary responsibility. Fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan. It also may include ensuring clear lines of supervision and ensuring systems integration is properly delineated.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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