Advisers must brace for DOL fiduciary by ramping up technology plans

The Department of Labor’s impending fiduciary rule has prompted advisers to review their strategic plans and weigh the expanded role technology will play in keeping advisory practices in compliance, as well as profitable.

The DOL’s fiduciary standard, expected to be released publicly later this month or in April, will require advisers to work in their clients’ best interests on retirement accounts.

The final rule won’t just change the way advisers charge their clients, it will put software at the center of meeting compliance goals.

LOWERING COSTS

Technology also will play a large role in helping advisers stay profitable, analysts and experts said. One question raised by the proposed rule is how advisers will manage small accounts that don’t make all that much money. Eric Clarke, chief executive of Orion Advisor Services, said using the right software can make advisers more efficient, therefore driving down costs and avoiding losses.

Financial advisers “should prepare not only for the DOL rule today, but I think they should be very focused on figuring out how they can lower their internal costs through the use of technology,” Mr. Clarke said. “If they don’t use technology to automate those and drive those internal costs down, it will be difficult to sustain current profitability levels.”

There are three key roles technology will play in the impending rule:

Advisers will have to provide recommendations that completely align with the client’s interests — this can be done with software that helps advisers better understand their clients through account aggregation, online collaboration and accurate risk profiling.

(Related read: Congress poised for its last stand against DOL fiduciary)

Technology also will support the adviser’s fiduciary position by documenting everything the adviser does for his or her client.

And a successful technology framework will keep advisers’ expenses low. An efficient back-end process will relieve advisers of the added costs that come with the DOL rule, which will force them to disclose fees and conflicts of interest.

Perhaps one of the most important tasks at hand for advisers is making recommendations that meet the needs of the client and proving those recommendations fulfill their fiduciary duties.

“The thing with technology, if used properly, is an adviser can very easily defend recommendations and strategies if they ever come into question,” said Neal Quon, co-founder of QuonWarrene, a technology consulting firm for the financial services industry.

Mr. Quon said it won’t be just one tool, but a suite of tools that makes this possible. For example, financial planning software will help advisers gather clients’ personal and financial information, risk assessment tools will assist in understanding the best way to invest their assets, and client relationship management software, or CRM, will keep the data organized. Portfolio management tools will report on and rebalance assets while data aggregators will pull in held-away accounts to provide a full financial picture of the client.

“Things they didn’t need to think about, they’re now faced with,” said James Formanek, vice president of sales at Panoramix, a portfolio management tool for advisers.

Consider risk assessment. Advisers will need to ensure clients are appropriately invested based on their situations, not adviser commissions. These software products will guide advisers to make the right choices and help prove to their clients why.

“There are a lot of advisers, let’s be honest, you go and look at their books of business and they always sell this particular mutual fund or annuity product to clients, and they have been operating under the suitability standard. That’s a loose standard,” said Aaron Klein, chief executive of Riskalyze, a risk assessment technology provider.

“If you understand the clients’ wants or needs with the Risk Number, you can demonstrate using different choices to fit that Risk Number, and you aren’t doing a one-size-fits-all sales approach to advice,” he said. Riskalyze uses a questionnaire to come up with the Risk Number, which determines the threshold of a client’s risk tolerance.

FinaMetrica, a risk-profiling software provider, looks at psychometrics, measuring knowledge, at–ti-tudes, personality traits and more to match a client with his or her risk tolerance. Advisor Software, a financial services technology provider with open architecture applications, has a risk assessment feature that prompts the client to update their questionnaire after a set time limit, said Erik Jepson, chief customer officer.

As part of the territory of being a fiduciary, advisers will need to document everything they do with and for their clients. This involves secure document management and time stamping, reporting fees and disclaimers, and managing invoices.

“They need to do their due diligence and adhere to compliance standards that before, when they were in the broker-dealer environment, the broker-dealer took care of,” said Mr. Formanek.

With the Department of Labor’s rule, technology will prove itself to be the crutch that lets practices thrive under this new regulation.

“It actually provides an opportunity for vendors to innovate, and what we will see is the birth of an emergence of new tools that will allow advisers to better facilitate their roles as fiduciaries,” Mr. Quon said. “We are already seeing quite a bit of collaboration between tools, and I think that is critical in helping find efficiencies and working across multiple systems for the benefit of the client,” he said.