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Using technology to comply with the Labor Department’s fiduciary rule

The Labor Department’s fiduciary rule changes are reshaping the way the financial advisory industry operates, creating a need for technology that will help with compliance and portfolio management.

4 min read

Finance

This post is sponsored by FolioDynamix.

Steve Dunlap

The Labor Department’s fiduciary rule changes are reshaping the way the financial advisory industry operates, creating a need for technology that will help with compliance and portfolio management.

Here we talk with FolioDynamix President and Chief Operating Officer Steve Dunlap about how the new rules are changing the business and how advisors can create better customer experiences while balancing these new demands. 

Question: How does the Labor Department’s new fiduciary rule change the landscape for financial advisors?

Steve Dunlap: There’s been a lot of discussion about how the rule was “softened” from the original proposal, but I believe the changes are still fairly dramatic for Registered Representatives who do significant commission business. Because all IRA accounts will now be subject to a fiduciary obligation, or require a BICE (best interest contract exemption), there is a major adjustment to be made in terms of paperwork and suitability standards, and frankly, the broker-dealer model does not necessarily lend itself to making these changes.

Even those advisors already focused on advisory business need to think through the full implications. The effects of the rule are almost certain to accelerate the shift to advisory, reduce the usage of commission-based products, and reduce sales of high commission products such as non-traded real estate investment trusts (REITS) and annuities. Furthermore, there will be additional scrutiny on the “best interest” methodology and additional documentation required for all advisors.

Q: While the process for crafting the rule was covered widely in the news, did any aspects of the final rule surprise you?

SD: The biggest surprise to me is how little discussion the industry has held about the potential for mounting litigation and arbitration costs. Much like the cost of malpractice insurance increases the price of medical care, I expect the enhanced private right of action under the ruling will have similar effects on the financial advice industry. The BICE requires that the advisor enter into a contract with the client that acknowledges the advisor’s fiduciary status as well as disclosure of fees and compensation. It cannot limit the liability of the fiduciary in the event of a violation of the contract’s terms. A fiduciary who violates this contract could be subject to a private cause of action for breach of contract, breach of fiduciary duty or other contract rights.

Q: How can technology help firms comply with the new fiduciary rule?

SD: It will be effectively impossible to comply without technology. Servicing smaller accounts will require the efficiencies and digital service enhancements that technology provides. And we fully expect sophisticated monitoring and measurement systems to evolve to help administer and meet strict adherence to fiduciary obligations.

It simply isn’t feasible for humans using manual systems to make sure that providers of advice are consistently hewing to their ongoing, significant fiduciary obligations across a broad set of accounts. Proper risk management will require the use of sophisticated digital systems and comprehensive recordkeeping.

Q: How has technology affected the wealth management industry over the last three to five years?

SD: Technology has made feasible the delivery of mass-customized and personally tailored advice. The industry has evolved from the scattershot brokerage approach of the “stock jockey” to the mass-diversified packaged mutual fund to the personalized portfolio. It is now moving to the broad availability of holistically structured and managed household-based, account-independent, personalized portfolios. Such an approach cannot even be contemplated without sophisticated technology that helps commoditize portfolio construction, asset allocation and ongoing maintenance such as rebalancing.

Q: Looking ahead, how will technology reshape the advisor-client relationship over the next three to five years?

SD: Just as kiosks will replace order takers at fast food restaurants, technology will augment and partially replace the layers of staff that advisors have historically used to create scale in their practices. A fully digital, asynchronous, information-rich experience will satisfy many clients, especially younger investors, while enabling advisors to simultaneously improve customer service and experience, expand the number of clients they can effectively service and drive down per-account costs of providing advice. The same technology will enable advisors to refocus their time and efforts on the activities that clients truly value: behavioral coaching, education and planning.