The Unintended Costs of Broker M&A

By Daniel Carpenter, Head of Regulation at Meritsoft, a Cognizant company

When Charles Schwab joined forces with TD Ameritrade in a $26 billion (£18.7bn) deal at the start of last year, many analysts predicted that this would only be the beginning of consolidation in the brokerage market. Since then, ongoing consolidation within the space is further shrinking the research options available to investors. This is because many of the firms folding into each other had covered overlapping equities, and at the same time as this consolidation these very same brokers are reducing their overall research coverage.

But just how many fund managers will already be receiving in-depth research from all these firms? Depending on the nature of the interactions in question, broker research rates between the two houses merging could differ significantly. What if, assuming further deals go through, an asset manager already receives a considerable amount of research from say two brokers involved in the same M&A deal? A fund manager, for example, may be OK with paying monthly fixed fees for corporate access from one research house, but not so keen on variable rates for insights into S&P 500 stocks from the other.

In fact, in a market increasingly devoid of choice, it could be that the brokers left standing will be forced to accurately capture all their specific research interactions, and then invoice against them. If having to wade through hundreds of interactions wasn’t enough, they would then need to reconcile against information provided by their fund manager. All this will do is have an even greater impact on the cost, processing and validation of billing and invoicing activities. This is probably not what stockbrokers on the acquisition hunt have in mind.

Even if only a few fund managers consider this approach, the big firms need to prepare for the worst. After all, it only takes one of the large asset managers to enforce this model, and suddenly the old approach of creating a spreadsheet and attaching it to an invoice becomes completely unsustainable. This begs the question, if asset managers start forensically assessing whether it is worth paying $10,000 or $10 on every line item, how exactly do the large houses go about accurately valuing research on a daily, monthly and quarterly basis?

Clearly, in an ideal world, nobody wants to get into “line by line” reconciliations. The reality is that fund managers will look at each line item because they have costs to either absorb or pass on. Whether we will see the widespread enforcement of this approach or not is too early to say. One thing is for sure, the rule changes to small caps add even greater complexity. Therefore, for the big players looking to take over smaller-cap firms, they will need to prepare for all possible eventualities. After all, if transparency is still the name of the game, perhaps they should arm themselves with the capabilities to meet the research demands of their clients.