The New Compliance

Measuring the Reach of the DOL Fiduciary Rule

Robo advisors win, financial advisors lose

by Ken Leibow

Mr. Leibow is Senior Vice President of Impact Technologies Group, Inc. His career spans 30 years, with an extensive background in distribution technology and back office systems. Visit

The DOL Fiduciary Rule is a disruption in the market place for financial advisors, investment firms, and insurers.

As we enter the 2nd quarter of 2016, a final definition of the proposed rule has been announced.

While financial advisors will be held to a greater standard of transparency in their commissions and fees, and expanding the scope to show alternative retirement plans for the best interest of their clients, Robo-Advisors will be the benefactor of firms changing their client strategy.

What is the DOL proposed Fiduciary Rule?

Here is a 30,000-foot summary of the new proposed DOL Fiduciary Rule:
On April 6, 2016, the U.S. Department of Labor (DOL) issued its final rule expanding the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA) and modifying the complex of prohibited transaction exemptions for investment activities in light of that expanded definition.

Basically this expands the scope of those who become fiduciaries. A fiduciary is any individual advisor such as a broker, registered rep, registered investment advisor, or insurance agent providing advice directly to a plan participant, plan sponsor or IRA owner for consideration of making a retirement investment decision.

The “suitability” test is no longer sufficient. Under the new rule, advisors must demonstrate that their advice is in the best interest of each client. Advisors must have much more transparency in their commissions and fees; and the advisor’s compensation cannot have a conflict of interest with their client. If you are just an order-taker broker and not giving any advice, then you are exempt from the rule. There will be a phased implementation approach; the key provisions of the rule will take effect on April 10, 2017, with a transition period through January 1, 2018.

Financial Advisors Lose with DOL Fiduciary Rule

Advisors will be impacted the most. They will have to sign a Best of Interest Contract (BIC). This agreement between the client and the advisor is a commitment for the advice to be in the best interest of the client and warrants that the firm has adopted practices and procedures designed to mitigate potential conflicts of interest when providing advice. This will require full transparency on commissions, fee structures and other compensation.

A Financial Institution will be limited on incentives to advisors like bonuses, awards and contests because they have to demonstrate that these don’t interfere with the best interest of the investor. The rule specifies “Reasonable Compensation”, which could also have a negative impact to advisors.

An adviser must disclose any conflicts of interest, like hidden fees, that might prevent the adviser from providing advice in the client’s best interest. Insurance agents selling annuities into retirement accounts will be treated as fiduciaries for the first time ever.

The DOL fiduciary rule may limit the products that financial advisors can offer their such as proprietary products because they would require broader advice for non-product related actions such as debt reduction, retention of assets in a 401K plan, etc. The biggest impact for financial investment advisors is the rollover and IRA business.

“The DOL has the chance to make the biggest impact on the financial services industry . . . ever. Certain products could go away or be changed significantly. Others could lose as much as 60% of their sales. This could be just the starting point with tax qualified retirement plan accounts and ultimately all products and services.

Our country could ultimately go the way of the UK and Australia that have a ban on commissions for advisors.” said Jim Sorebo, CLU , President & CEO of Four Seasons Financial Group, a leading wholesale distributor of insurance and annuities in banks and broker/dealers in the U.S.

Help is Available to Advisors who are Impacted by the DOL Rule

Insurance agents selling annuities into retirement accounts will be treated as fiduciaries for the first time ever.

Many advisory firms are considering re-evaluating their service models, the products they recommend and the investors they serve in response to the pending DOL fiduciary rule.

Firms will have to make investments in compliance changes and training for advisors. Even though there are challenges advisors have to face, they will get assistance from their broker dealers that will provide some relief. Technology can play a big role in assisting advisors with their concept presentations to clients.

Since Advisors will need to expand their advice to meet the requirements of the DOL Fiduciary Rule, there are automated tools that are analytical planning platforms (my company is one such provider). For example, they can demonstrate how to reduce retirement risks with annuities and life insurance, and illustrate alternative options for qualified retirement plans. Most of the tools are online and optimized for mobile devices.

The Popularity of Robo-Advisors

In the last 18 months, there has been an explosion of Robo-Advisors in the market place. A Robo-Advisor is ‘technology providing investment advice’ and uses algorithms to determine asset allocations and automated rebalancing for investors without having to work with a human financial advisor.

These platforms can be accessed online using your browser from your desktop/laptop computer or a mobile app that can be installed on your smartphone or tablet like an iPad. Robo-Advisors are attracting young and middle-aged investors who are accustomed to doing business online and using their mobile devices. Robo-Advisors have an easy user interface, quick response to requests and low cost, which is why Robo-Advisors are rapidly growing in popularity.

There are different types of robo-advisors: Robo-advisors such as “Wealthfront” and “Betterment” have inexpensive management fees, a diversified ETF portfolio and reasonable account minimums. Then there are online robo-advisors that charge no management fees such as “WiseBanyan” and “Charles Schwab”. There are robo-advisors that can manage your employer-sponsored management plans like “FutureAdvisor” and “Bloom”. Finally, there are hybrid services that combine both a robo-advisor with a human financial advisor such as “Vanguard” and “Personal Capital”.

“The automated investment platforms industry has seen dramatic growth, from almost zero in 2012 to a projected $300 billion in assets under management at the end of next year. This year alone, Betterment almost tripled its assets to $3 billion. Robo-advisers could manage $2.2 trillion by 2020,” according to Bloomberg News.

Robo-Advisors Win with DOL Fiduciary Rule

Robo-Advisors are the big winners with the new DOL Fiduciary rule, with the opportunity to grab business abandoned by full-service wealth management firms.

The new DOL Fiduciary rule will increase expense to Financial Institutions because of the broader scope of advice that advisors will be required to provide to investors. As a result, many firms will focus instead on larger accounts. “Under the new rules, full-service wealth shops are likely to rid themselves of clients with low account balances,” said Morningstar analyst Stephen Ellis, “which will benefit robo-advisors and other players to the tune of an estimated $250 billion to $600 billion of IRA assets”.

What is great about the automated investment advice technology is that the programs are scalable and can be updated quickly to support the new DOL Fiduciary rule. There will be an upfront cost to make the changes, however ongoing maintenance cost will remain the same. The overall cost to the investor using a robo-advisor will most likely not change.
There are always winners and losers with these types of rule changes. Advisors are the most impacted by the DOL Fiduciary Rule. This could result in a decline in new advisors entering the market place. I am sure many firms will be evaluating creating Robo-Advisor products. ETF products will continue to grow.

Low fund Robo-Advisor providers like Charles Schwab, Betterment and Wealthfront will benefit the most from the DOL Rule change. Many firms may make up the loss of revenue by finding new ways to charge fees to clients, but this will ultimately drive more business to Robo-Advisors. ◊