Future of Investing

Roboadvisors and the DoL rule: No more guessing

  • The DoL, in its first batch of FAQ, clarified its position on whether roboadvisors can be fiduciaries.
  • Turns out specific types of roboadvisors are.

Email a Friend

Roboadvisors and the DoL rule: No more guessing
When the DoL fiduciary rule passed, many feared that small retirement accounts will be orphaned because the changing fee structure will make them unattractive to advisors. In response, others claimed that automated advice, or roboadvisors, should be able to swiftly, cheaply and compliantly sweep those accounts up. However, many top level officials, executives and legal experts have debated whether software-based, automated advice can truly client’s personal situation into account when issuing advice and conducting proper due diligence.  Such solutions lend themselves to a one-size fits many model, experts say, and might not qualify as having the clients best interest. The DoL just issued its first FAQ, clarifying its position on the subject. The bottom line: roboadvisors that can act as level fee fiduciaries are OK. “There is a clear and substantial conflict of interest when an adviser recommends that a participant roll retirement savings out of a plan into a fee-based account that will generate ongoing fees for the adviser that it would not otherwise receive, even if the fees going-forward do not vary with the assets recommended or invested,” the DoL wrote in its FAQ. “The streamlined level fee provisions of the BIC Exemption cover roboadvice providers engaging in these discrete transactions.” The rationale for this exception is that charging a level fee eliminates any conflict of interest that arises from the traditional commission-based compensation structure. Level fee fiduciaries must still comply with the impartial conduct standards, which require fiduciaries to act in the best interest of their clients, charge no more than reasonable compensation, and make no misleading statements. This puts some robos in hot water, particularly those that are, in effect, distribution channels for proprietary products. The classic, plain vanilla, roboadvisors, like Betterment and Wealthfront, should feel pretty comfortable under the level fee exception. Incumbent-run digital portfolio managers, which tend to overemphasize their own financial products, might have a hard time complying with the impartial conduct standards. For example, though Schwab Intelligent Portfolio charges investors a level fee of $0, it does charge investors different fees for different products offered by automated advice.  Under this scenario, there is a clear incentive to offer certain products and not others. This is exactly the type of conflict of interest the DoL sought to eliminate.

0 comments on “Roboadvisors and the DoL rule: No more guessing”

Future of Investing

The effect of ‘money on the sidelines’ on fintech

  • As interest rates rise, money is increasingly finding its way towards safe, high yielding assets.
  • This is creating a challenge for fintechs predicated on selling or brokering riskier assets.
Zachary Miller | August 01, 2023
Future of Investing

With its core business slumping, Robinhood is eyeing credit cards

  • Last month Robinhood announced that it will be acquiring X1, a startup that offers income-based credit cards.
  • We dive into why Robinhood is expanding into credit cards and what X1 is bringing to the table.
Rabab Ahsan | July 28, 2023
Banking, Business of Fintech, Future of Investing

Closing the equity gap for underrepresented entrepreneurs: How Bank of America is driving diversity and inclusion in venture capital

  • Many small and new businesses are phasing out every year in the US. Although it can be argued that there are many reasons that may contribute to the failure of these businesses but inaccessibility to funding appears to be one of the root causes.
  • Bank of America is en route to creating a new narrative. To address these stumbling blocks and shine a light on diverse fintech founders, the Wall Street bank is devising an accelerator program called ‘Bank of America Breakthrough Lab’.
Sara Khairi | June 02, 2023
Future of Investing

Amid shifting market dynamics, how can wealth managers create value?

  • The wealth management market is going through a rough patch. Economic uncertainty and financial stress are having a negative impact on investor sentiment, shows a new EY global wealth research report.
  • As a result, clients have started to ask more questions and demand more proficiency. 
Sara Khairi | May 17, 2023
Future of Investing

Philosophical Switch: Wealthfront introduces stock investing and plans to build investing habits for the long run

  • Stock trading by small investors is on the up and up.
  • Just in time Wealthfront has launched the option to invest into individual stocks exemplifying a philosophical switch in its robo-advisor business model.
Rabab Ahsan | March 23, 2023
More Articles