By Dominic Litz
Fidelity Investments acquired eMoney Advisors, a wealth management software company, in 2015 to evolve with the rapidly changing times of technology and compliance. Utilizing the company’s technology, Fidelity introduced its “fiduciary framework” which will help advisers comply with the Department of Labor’s (“DOL”) new fiduciary requirements. The new fiduciary requirements set forth by the DOL, set to be fully implemented in January 2018, has investment managers quickly figuring out ways to comply. The new rule is set to make sure advisers are being held to a high fiduciary standard and fulfilling their duty to act in their clients best interests.
The regulation has many different aspects to it, but generally it defines who is a fiduciary investment adviser, while allowing the defined advisers to receive a variety of forms of compensation as long as they are willing to adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their customers. (Fact Sheet: Department of Labor Finalizes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle Class Families Billions of Dollars Every Year). Furthermore, the Rule will require the disclosure of all “recommendations” made, as defined by the Rule. (Id.). A “recommendation” is a communication which is reasonably viewed as a suggestion as to the action to be taken regarding an investment. (Id.).
Keeping up with the changing trends of investment is tough enough, now advisers will be under the microscope with these new requirements. Fortunately technology is adapting to the times and firms are taking advantage of it in preparation for the implementation. Fidelity’s new “fiduciary framework” will monitor interactions between advisers and clients, as well as provide documentation to prove the advisers are acting in their client’s best interest. Being able to provide this type of documentation and transparency will be crucial for enhancing client relationships and complying with these strict requirements.
At a recent conference in California other financial technology (“fintech”) firms also introduced DOL tools to assistance advisers to uphold their fiduciary requirements. One company is using research from Morningstar to gauge a client’s risk tolerance, allowing the adviser to individualize a plan for that client. Ted Tsung, CEO of AppCrown, a fintech firm which integrates Salesforce client relationship management, believes that more registered investment advisors (“RIAs”) will seek out tools similar to eMoney’s “fiduciary framework” and their client relationship management as the implementation date approaches.
With the DOL’s implementation of fiduciary requirements, investment firms may take similar actions like Fidelity, and acquire software firms who have already created fiduciary tools to optimize compliance while sustaining profit margins. These financial tools would hopefully be adaptive to satisfy each firms needs and their style of investment planning, albeit traditional advising or with the new trend of automated robo-advisors. Having more transparency and more documentation of advisor-client interactions will allow for clients and government institutions to know that advisers are acting in their best interest. Furthermore, increased transparency will allow for advisors to be better protected from litigation from clients for fiduciary violations or from the government from statutory violations.
Being able to track the communication between an advisor and the client with the help of fintech software, while it will be in conformity with the DOL’s new Rule, it will also decrease the likelihood of litigation against the investment firms. Showing when, what context, and the reasonable suggestion the advisor made to the client, the investors are shielding themselves from being sued for a breach of fiduciary duty. This may not be as true for robo-advisors because the interaction between the algorithm and client is not as robust as the interaction and communication between a traditional advisors, and harder to track, even for fintech software. Therefore, if robo-advisors are held to such a high fiduciary standard, they may see increased litigation or potential pitfall in their low cost platforms.
Technology has always played a large part in investment firms, but in the recent years there has been a trend to relying more on technology to attract new customers through robo-advisors and now technology will be used to comply with new fiduciary requirements. While traditional advisors will be able to track their interactions with clients, how can robo-advisors track client interactions when it’s controlled by an algorithm?
Unfortunately, robo-advisors of all size and functionality are going to be hard-pressed to provide the DOL with documentation of client interactions because it is limited after the risk tolerance questionnaire. However, if robo-advisors try to integrate other types of technology to understand a client’s tolerance for risk or communicate with the client about where the investments are going, that will likely satisfy the requirements if the DOL wishes to hold them to the fiduciary standards.
Student Bio: Dominic is a staff member of Journal of High Technology Law. He is currently a 2L and received a B.S. in Finance from Loyola University of Maryland.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
