Many small U.S. broker-dealers and financial advisors are abandoning the municipal finance business due to the increased costs of regulatory reform, said Kevin Dunphy, head of finance at Mitsubishi UFJ Financial Group (MUFJ).
“One of the biggest impacts of regulatory reform that I see – really as an unintended consequence – is the demise of the small municipal finance firm,” Dunphy said. “These firms suffer disproportionally because the increasing regulatory costs consume a greater share of their revenue, significantly reducing profitability.”
Dramatically declining fees paid to underwriters and lower municipal bond issuance are other key reasons that small broker-dealers and financial advisors will continue to exit public finance, Dunphy added, speaking at MUFG Explores, an issues-oriented series in which MUFG subject matter experts meet with journalists to discuss topics and trends.
“Further, when you combine the increasing regulatory costs with declining underwriting spreads and lower issuance, firms’ margins are under severe pressure. The expectation for lower issuance will increase competition for the remaining deals and make matters even worse for these small firms,” Dunphy said.
These small firms, with expertise in local markets, are valuable resource for municipalities. Another consequence of this exodus is that these municipalities are in danger of losing their most knowledgeable and reliable financial experts, Dunphy noted.
“New compliance requirements decrease the amount of time bankers and advisors can spend with their clients,” he said. “Ultimately, it will be the municipalities that bear the cost of regulations in the form of increased costs or rates, and the lack of supply.”
Dunphy also discussed the need for infrastructure spending. “While it is refreshing to hear the new administration talk about infrastructure investment plans,” he said, “I am still waiting to understand how we will pay for it.”
Promises to upgrade the nation’s bridges, roads and tunnels have been largely more talk than action.
“Over the years, Washington has kicked the can down the road and, as a result, America’s infrastructure is in dire need of repair, replacement, and new projects,” Dunphy said.