Technology’s rising role under DoL fiduciary

DoL fiduciary rule and technology

Since the Department of Labor published its fiduciary rule in April, major participants in the industry are pouring in money and time to make sure they are compliant before April 10, 2017. The operational challenges and changes brought about by this rule will also affect the way technology is used to provide those services.

The DoL rule, meant to protect common investors, requires financial advice and retirement guidance over 401(k) and IRAs to be given under a fiduciary responsibility. This means advisors must put the interests of clients first, before the advisors’ own interests or those of the advisors’ firms.

For example, advising a client to buy a product issued by the advisor’s firm, while a similar product with lower fees exists in the market, could be a breach of fiduciary responsibilities. Advice like this could subject an advisor and his firm to regulatory and litigious risk.

Capturing and processing customer data is a significant challenge with the DoL fiduciary rule. In order to comply with some aspects to the rule package, data that isn’t currently tracked and collected must be made available. For other parts of the rule package, data that now exists in separate silos must be aggregated together.

For example, if a worker moves to a new workplace and wants to rollover her 401(k), a broker-dealer will need to build a detailed ‘decision tree’ when considering which product to recommend, both for the process itself, but also to prove to regulators and lawyers that the decision was fiduciary. In some cases, manually gathering all the parameters affecting the decision could take weeks, a process some vendors are trying to automate.

About 50% of 401(k) rollovers to IRAs can be attributed to a decision by an advisor, a sum totaling about $320 billion each year, according to Yuval Zurel, CEO of FeeX, a company that uses big data to determine whether a 401(k) rollover is compliant with the new DoL fiduciary rule. Transparency and compliance costs might make this business way less profitable. For that reason, some advisors are mulling exiting the business. Others are crafting new compensation models.

FeeX was built as a portfolio dashboard to assist advisors. An advisor sends a opt-in form to a client, connecting FeeX’s platform with the client’s accounts. The technology firm’s algorithms then hunt, combine and crunch data from the aggregated accounts, producing a report that compares the costs of initiating a rollover to an advisor’s IRA product versus maintaining the existing 401(k) account. Tools such as FeeX can solve the cost problem associated with proving advisor advice was fiduciary.

Large firms surveyed by Deloitte estimate their costs of becoming compliant to be over $38 million, with additional ongoing expenses to vendors and suppliers to manage the duplicate systems at $9.5 million. Startup and ongoing compliance cost estimates for medium-sized firms may run $23.1 million and $5 million respectively. Besides projected human, software and hardware costs, advisors expect to loose money due to fee-related changes associated with the rule.

The new DoL rule may take billions of dollars off the table, as the industry benefited from data opacity until now, Zurel said.  Those who choose to embrace transparency, though, might find it to be a competitive advantage and a differentiator. “A company can’t truly be transparent without technology,” he remarked.

One concern raised by opponents to the rule package is that smaller retirement accounts may be orphaned, as lower fees will make them unprofitable for brokers. Technology consultancy CGI recommends that firms handle smaller accounts through roboadvisors, which will lower the cost of managing those accounts.

There have also concerns whether the use of automated investment advice can be regarded as fiduciary. “The idea of a robotic entity that automatically generates investment advice certainly bumps up against what we would traditionally think of as a fiduciary,” said SEC Commissioner Kara M. Stein during at guest lecture at Harvard Law School last year. It is possible that some robos, those with better artificial intelligence capabilities and better access to data, will be considered fiduciary, while others will not. Regulators will need to answer these questions in the coming years.

Advisors can leverage the implementation of new technology both to comply with the new rules and provide best quality advice. Advanced software with various level of machine learning capabilities can help advisors better tailor advice and products to their clients and defend that decision if the need arises.

“Technology will be the linchpin that helps hold together financial firms’ operations under the fiduciary rule regime,” CGI said.


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