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Technology can help advisers ensure they are giving 'best' advice to meet DOL fiduciary rule

Data aggregation — and knowing what's on both sides of a client's balance sheet — is key to meeting new requirements

Oct 28, 2016 @ 11:20 am

By Ed Gjertsen II

It has been said that necessity is the mother of invention.

The financial services industry is fast approaching a key April 2017 deadline that will require advisers to act as fiduciaries when advising clients on retirement accounts, products and services. Since the release of the Department of Labor Conflict of Interest final rule, a variety of companies have invented or re-invented a wide range of products and services to help firms and advisers comply with the new standard.

The financial services profession will need to evolve, and evolve quickly. The adviser acting as an ERISA fiduciary must act prudently and in the best interest of the client. One way to meet the higher standard is for firms and advisers to leverage existing and new technologies.

Aggregating client data and coupling it with better compliance systems integration will be a critical first step in the process.

(More: A comprehensive, searchable database of advisers' fiduciary FAQs)

Client account aggregation has been around for decades in one form or another, but the recent fintech revolution has added more players to the mix. Tech firms have been pushing the aggregation envelope to create adviser dashboards that connect multiple platforms, such as CRM, financial planning software and client aggregation services.

In the post-DOL-fiduciary world, it will be a challenge for advisers to determine what is in the best interest of a prospect or a client by relying on the old data gathering techniques that were sufficient to meet a suitability standard. The ability to efficiently obtain comprehensive financial data will be a key element for the adviser to document how they are acting in a client's best interest.

Data aggregation of a client's financial life should include information about assets held inside and outside the firm. These outside financial assets could include corporate retirement accounts; money market, checking and savings accounts; along with insurance policies.

It should also include liabilities such as credit cards and home mortgage balances. This may be an unfamiliar area for advisers who have focused their entire business model on analyzing and managing client assets, and not their liabilities.

What may be “best” for a client may not be an updated investment allocation or adding money to a portfolio, but rather a plan to pay down a high-interest credit card balance or to refinance an existing mortgage. Offering comprehensive financial advice rather than specific investment guidance may be useful in adhering to the DOL fiduciary rule; and the effective use of technology, such as an adviser dashboard, is a prudent start in the process.

BUDGET FOR TECH

Firms of all sizes will face similar yet distinct challenges. For all, there is a cost associated with technology both in terms of money and efficiency.

Small- to mid-sized firms may need to build out their technology capabilities, and they'll find a dizzying array of options. They may even lack the internal capacity to fully vet and implement a desired tool.

It will be challenging because some firms may be selling “vaporware,” in which they're promising a solution to compliance with the DOL but haven't fully developed a platform yet, said Kevin Knull, president of PIEtech, the purveyors of MoneyGuidePro.

Larger firms that oversee hundreds or thousands of advisers may need completely new, innovative technology.

(More: DOL releases first batch of FAQs on fiduciary rule)

These large firms are seeking help in developing and monitoring investment policy statements, according to John Faustino, chief product and strategy officer for fi360. Not many automated systems tie together a client's IPS with a firm's compliance surveillance program, and automation is only the first step, he said.

"Technology can assist but what about the human judgment that goes into many of these relationships?" Mr. Faustino asked. This is an area he believes may create opportunities to develop tools for firms to put "guardrails” in place for their advisers.

"Compliance is the last frontier for technology to address," said G.J. King, president of RIA in a Box. "The DOL rule will create a heightened need for firms to organize and access data to obtain a more holistic view.”

Necessity and invention go hand-in-hand. The challenges associated with complying with the DOL rule may be offset by those firms and advisers who use technologies to expand and improve their internal operations, as well as client services.

Ed Gjertsen II is chairman of the Financial Planning Association and vice president of Mack Investment Securities.

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