DOL rule could lead to broader tech use, spread of fiduciary standard
January 26, 2017 by Marlene Y. Satter
A new report from Celent says that the conflict-of-interest rule from the Department of Labor could lead to a wider adoption of optimization software to assist in recommendations that would satisfy the fiduciary rule.
And the application of a fiduciary standard beyond the area of retirement could also happen regardless of any action against the rule that may be taken by the Trump administration.
The report, “Wings of a Butterfly: Regulation, Rollovers, and a Wave of Optimization Software,” said that, despite opposition by brokers, the interests of the DOL and the advice community, including those brokers who represent themselves as “advisors,” “will be ultimately aligned.”
Looking at the rule from the standpoint of the IRA rollover — specifically, rolling over assets from a 401(k) or other retirement account into an IRA — the report said that that decision will act as “a touchstone for the broader client/advisor relationship.”
It continued, “Trust sits at the center of recommendation to roll over, and seldom are the knowledge deficits and other vulnerabilities of both client and advisor so exposed. At the firm level, the way rollovers are managed has significant implications for product development and distribution strategy, both of which will reflect the new regulatory mandate.”
Even if the rule is killed by the new administration, that “will not obviate the need for change,” the report said, pointing out that not only is it “hard to envision firms (particularly those firms that have spent millions in marketing their new ‘client-friendly’ approaches) arguing that they are no longer bound to act in the best interests of the investor,” but that “[f]irms will find it exceedingly difficult to maintain one standard of care for taxable accounts and another for nontaxable holdings.”
Portfolio optimization software and other technology will help to meet that challenge, demonstrating to clients that firms are operating in their best interests and “doing so at reasonable cost.”
In addition, such technology will help advisors to conquer some of the challenges that have made them wary of continuing to use 401(k)s as a “feeder system,” rolling them over into more profitable IRAs: costs, litigation risk and administrative burdens imposed by the DOL rule.
If the rule goes the way of the dodo under the new administration, that won’t halt the implementation of the fiduciary standard; “the genie is out of the bottle,” the report said, and it will spread beyond the retirement market with firms integrating rollover analysis and recommendations into their broader advice engines and account aggregation tools, “to enable the delivery of advice on the whole of the client’s assets to prove to clients that conflicts of interest have been eliminated.”
