By Dominic Litz
The Department of Labor (“DOL”) has gone through years of drafts, arguments, hearings, and push-back over their recently approved Rule which redefines who a fiduciary is. After all that work, the Trump administration delays it. First off, a fiduciary is a person who is held to one of the highest ethical standards to act on behalf of a principal in their best interest without a conflict of interest. The DOL’s new Rule has broadened the definition of who is a fiduciary and what actions must comply with their new rule in order to protect the investor from a conflict of interest. This strict standard is going to influence all types of advisers and firms; however, there may be some who benefit more than others.
Regardless of the delay in the implementation of DOL’s Rule, the trend in the investment industry seems to be that advisers are still going to prep like the rule is being implemented in the original April 2017 date. In the past few months, a Kansas and Texas appeals court have upheld challenges to the DOL’s rule which seems to indicate that full implementation is imminent. This has led some experts to predict that robo-advisers will be one of the big “winners” of the implementation of this Rule.
A big part of the DOL’s Rule surrounds compensation and fee structures and making sure that advisers are acting in their client’s best interest and not overcharging for services. Therefore, there will likely be a shift towards more level fee structures, opposed to commission based structures. One expert believes “[t]he DOL fiduciary rule has been criticized, because it limits an FA’s ability to profitably service small accounts.” See Will Robo-Advisors Benefit From the DOL Fiduciary Rule? TheTrustAdvisor.com (Mar. 1, 2017) archived at https://perma.cc/VNA8-VG8L. This theory is why some experts believe robo-advisers will benefit from the implementation of the DOL’s Rule. Robo-advisers have established there place in the market as a low-cost, generic low risk investments and hands-free platform for investing, which fits with the way advisers may be shifting their practices under the new Fiduciary Rule.
Robo-advisers attract customers by offering accounts with minimal initial startup costs, as low as $500, thereby being able to service small investors, something large firms may move away from under the new Rule. Some experts believe that while robo-advisers will definitely benefit from this new rule, it is unclear how much they will benefit because there will be some larger firms who implement their own robo-advisers to service smaller clients. One example is Merrill Edge’s new Merrill Edge Guided Investing platform. This is an “intuitive new online investing service that combines expert insight with the convenience and flexibility of online management.” See id.
With implementation of the DOL’s Rule seemingly inevitable, robo-advisers do seem to be positioned to take advantage of any client’s that large firms drop because they don’t see small accounts as profitable. However, it may not be as easy as some experts think. There are certain exemptions which advisers and firms can utilize to maintain some of their fee structures so long as they comply with additional rules. Furthermore, large investment firms are already purchasing or implementing their own robo-advisers, as evidenced by Merrill Edge, to service both large and small investors.
Although the DOL’s rule is currently delayed 180 days due to the Trump administration, it is likely that it will still be fully implemented. Financial institutions will be ready because they are proactively preparing for it to happen even with the delay. Moreover, robo-advisers are lying in wait to hopefully scoop some dropped clients from large firms who don’t see the value in the smaller accounts. A lot is to be determined in the coming months; who knows, maybe robo-advisers are the future of investing and will begin to compete with the big firms.
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.