President-elect Donald Trump is widely expected to cut regulations across the financial sector, including the Department of Labor’s new fiduciary rules. While this has left financial advisors and broker-dealers in a state of limbo, fintech companies are continuing to roll out solutions designed to meet the fiduciary rules since the trend toward putting clients’ best interests first—and advisors trying to better adhere to the rules—isn’t going away.
In this article, we will look at some of these new technology solutions and important considerations for financial advisors. (For related reading, see: How Advisors Can Plan for Fiduciary Rule Changes.)
Is the Fiduciary Rule at Risk?
The Department of Labor introduced rules on April 6, 2016 that expanded the investment advice fiduciary definition under the Employee Retirement Income Security Act of 1974 (ERISA). Under the new rules, financial advisors must act in the best interest of clients when offering guidance on 401(k) plans, individual retirement accounts, or other qualified retirement savings—or have them sign a Best Interest Client Exemption (BICE).
With the new rules set to go into effect on April 10, 2017, financial advisors have been scrambling to achieve compliance with new tech solutions. Many advisors are faced with the decision of moving to a fee-based business model that’s more compatible with the new rules, continuing to use commission-based products with the risk of disclosing conflicts, or exiting the business altogether and focusing on non-retirement accounts.
Trump has promised to roll back financial regulations, which sparked a rally in financial sector stocks since his surprise election. While the Dodd-Frank regulations are the primary rules on the chopping block, the DoL’s fiduciary rules could similarly be rolled back. Supporters of the DoL’s new rules argue that Trump has never explicitly stated that he opposes fiduciary rules and has made no campaign promises to roll back these regulations. (For related reading, see: Mobile Banking: How Big Banks Are Innovating With Fintech.)
Fintech Takes a Different View
The financial technology industry has decided to continue developing technologies to support the new fiduciary rules despite the uncertainty. Many software vendors believe that the demand for transparency will only increase over time even if fiduciary rules are rolled back. The transition from active to passive exchange-traded funds (ETFs) and mutual funds suggests that retail investors are becoming increasingly fee-conscious over time.
There are many different technologies being developed to help increase transparency and meet the new rules. For example, RiXtrema’s FeeComp enables advisors to compare their fees with others based on geography or assets under management, while AssetMark’s Assessment Tool lets advisors determine their readiness for the new rules. New technologies and upgrades to existing solutions are being announced on a weekly basis to meet these new rules.
These new technologies may make it easier to comply with the new laws, but advisors must still understand how the technology works and the end results are calculated. Advisors must change their mentality—if it hasn’t been done already—so that they're working in the best interest of clients rather than optimizing for profit. In addition, they must be ready to prove that their decisions were made in the best interest of clients to fully comply with the new rules.
The Bottom Line
Trump’s surprise election has made the future of the DoL’s new fiduciary rules uncertain. With plans to roll back financial regulations, Trump could decide to delay or eliminate these new rules as part of his efforts to reduce red tape. Advisors may be waiting on some guidance, but the fintech industry is continuing to develop new technologies to improve transparency with or without the new rules. Advisors should consider these technologies to prepare for the upcoming fiduciary rules, as well as address client concerns over fees and conflicts of interest. Even if the rule is delayed or overturned, most advisors could benefit from increasing transparency. (For related reading, see: Technology That Helps Advisors Automate.)