Robo-advisers poised for DOL fiduciary rule, but unintended consequences loom

Uniformity, pressured large institutions are just two of the possible outcomes for automated investing services

Mar 31, 2016 @ 1:42 pm

By Alessandra Malito

Robo-advisers say they'll be just fine as the industry heads into the final countdown of the Department of Labor's impending fiduciary rule, but potholes along the way could push executives out of their comfort zone, according to an InvestmentNews roundtable of executives at many of the leading digital-advice platforms.

During the discussion, executives from Folio Institutional, Jemstep, Vanare, Betterment, Financial Engines and Hedgeable highlighted their positions facing the controversial DOL rule. The executives overall agreed their platforms can provide advice for clients, and perhaps do so better than some traditional advisers. For the instances when a client wants to work with an adviser, their technology will facilitate a better relationship for the two, they argued.

"Software is better at advice generation, generally speaking," said Christopher Jones, chief investment officer of Financial Engines, which is registered as a fiduciary. "The reality is a lot of advice given in the world, although well intentioned, is not high quality … We have always seen software as a major factor in improving quality of advice."

Folio Institutional, Jemstep, Vanare support fiduciary advisers with their technology, while Betterment, Financial Engines and Hedgeable are already registered as fiduciaries.

The conversation kicked off the first of a series of Fiduciary Focus roundtables InvestmentNews is hosting to discuss the coming DOL fiduciary rule, which is expected to be published in its final form as soon as next week. The next InvestmentNews discussion will be the regulatory roundtable Friday, April 8 taking place in Washington.

Morningstar research shows there will be more than $1 trillion of client assets that could move into passive investment products, increasing adoption of robos.

Robo-advisers have garnered criticism in the past, mostly saying advice takes human experience and empathy, and clients may not trust robos to walk them through the tough times. Robo executives said the Department of Labor's rule can go so far as to help clients pick platforms they can get behind.

"The trust point is interesting. It is whether interests are aligned with yours," said Seth Rosenbloom, legal counsel at Betterment. The DOL rule will wash away any concerns of conflicted interest, as well.

Matt Kane, co-founder of Hedgeable, said most platforms go backwards — they look at regulation and build a product, as opposed to building a product that is already aligned with clients' best interests.

"From our standpoint, we don't need to change," Mr. Kane said. "We view it as if this happens or doesn't happen, our business shouldn't change."


It could change for these robo players though, who may start to look the same. It will also likely light a fire under large incumbent financial institutions that see the need for this technology, something that has already been proving true as firms pick up robos or announce they are in the process of building one.

"While it may be an initial boon for firms to license services to big companies or be acquired by big companies," said Mr. Jones, "it will turn up the heat with big firms with big resources."

In the past year alone, Envestnet acquired Upside, now called Advisor Now, BlackRock acquired FutureAdvisor, Schwab and Vanguard came out with their own platforms, Fidelity began working on one and many more were put to work.

The fiduciary rule may make institutions and their platforms start to look the same too.

"Everyone will need to have the same stack of services," including familiar investment products and data aggregation, said Lex Sokolin, chief operating officer of Vanare.

If so, innovation will be a bit more difficult to manufacture.

"Complexity will go up a notch and that makes it harder, not impossible," said Greg Vigrass, president of Folio Institutional. "Creating a culture and still operating in that environment is a tough needle to thread."

This is when platforms will meld human advisers with technology. Folio, Jemstep, which Invesco acquired earlier this year, and Vanare, which acquired NestEgg in 2014, are companies that offer robo-adviser technology to firms and advisers.

Mr. Sokolin said his platform is gearing up for the rule by building bulk tools for advisers to digitize their practices in a compliant way. Jemstep, which Invesco recently acquired, said his platform is set to help institutions who realize technology will be the backbone of any DOL regulation.

"We won't be talking about robos in the next few years … technology has become the absolute core to delivery," said Simon Roy, president of Jemstep. "If we believe that, then the solution for vast bulk of firms will be a platform that works within the advice model within the large institutions' current delivery approach. That's what we designed our platform to approach."


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