Higher compliance costs associated with the Labor Department's fiduciary rule may kick start a new wave of industry consolidations.

Small independent advisors, who lack scale and resources, may look to join forces with larger firms, Raymond James CEO Paul Reilly says.

"It is tough on the industry and on players when you have this much regulatory costs. We certainly feel it. And I'm sure that our competitors… it's tough on them too," according to Reilly, who was responding to analysts' questions during an earnings call on Thursday.

While Raymond James may benefit from independent advisors deciding to join the firm, Reilly does not necessarily welcome the changing industry landscape.

"We like there are plenty of independent-owned firms in the industry. We certainly don't want to be the only one," he says.

The final version of the rule, which requires advisors to provide clients retirement advice that is in their best interest, was unveiled earlier this month. Like other CEOs speaking during recent earnings calls, Reilly declined to specify how high his firm's compliance costs may rise, saying that it would take some time to digest all the implications of the regulation.

But he did say that it would require adjustments in the firm's strategy. "We may have to reallocate resources and reschedule some projects because as you make changes to one system it will affect other systems. But we are dealing with it and we will comply."

ACQUISITIONS

The St. Petersburg, Fla.-based firm reported that pretax profits for its wealth management unit increased 10% year-over-year to $83.2 million for the quarter ending March 31. The number of financial advisors, both employee and independent, hit a record high of 6,765, up 78 from December 2015.

On employee advisor recruiting, Reilly says that the firm's pipeline remains strong and that he hasn't seen any slowdown related to the fiduciary rule.  Prompted by an analyst's question, Reilly said that while it is possible that some advisors may hold off switching firms this year because the amount of compliance paperwork likely to be involved, "we don't see that indication now."

Separately, Reilly says that Raymond James' acquisition of Deutsche Bank's U.S. Private Client Services unit is on track.  The deal is expected to significantly boost the firm's presence in several key markets, notably the Northeast.

"It's a great fit for Raymond James but also for those advisors," Reilly says.