Digital wealth firms react to an endangered fiduciary rule

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After a federal court struck down the Labor Department's revised fiduciary rule, the digital wealth management industry’s top chiefs are speaking out.

A number of digital investing and advisor tech firms have been strong supporters of the rule, arguing it aligns with their goals of increased transparency, protection for individual investors and greater, cheaper access to investment advice.

Now, chief executives from the leading platforms have drafted messages addressing regulators and the DoL, which is reviewing the rule with an eye toward possibly quashing it.

What will eventually happen to the rule and its impacts on the industry remains to be seen, but firms are calling for the DoL to appeal the ruling and advocates are asking the regulator to take arbitration all the way to the Supreme Court, if necessary.

The decision is not only a step backwards for the industry, but attacks millions of hard-working retirement savers, says Betterment CEO Jon Stein. “Once again, Wall Street firms have won at the expense of the individual investor,” he says.

Other regulators, like the SEC, are looking into producing their own standards for investment advice that could be a less stringent version of the original, experts say. Even President Trump expressed his opinion on the rule asking for it to be removed in February of last year.

“Americans should be able to trust financial advisors to act in their best interest and not worry about whether advisors are putting their money in investments that are ‘suitable’ rather than ‘optimal,’ ” says Personal Capital top chief Jay Shah. “We encourage, and support, American investors to take a stand and demand the transparency they deserve.”

For Christopher Jones, CIO of Financial Engines, which was among the tech firms in D.C. when the rule first passed, a higher standard of client care is necessary for the evolution of the industry. “There will always be a need for individuals to have access to objective and independent investment advice to successfully plan for retirement, regardless of their wealth or investment experience,” Jones says.

While the Fifth Circuit Court of Appeals ruling was certainly a blow to the rule, a number of digital advice supporters say increased awareness of best interest standards could help push the fiduciary movement forward. "Bad day for consumers, but the long-term trend towards fiduciary service is unstoppable,” wrote former Wealthfront CEO Adam Nash on Twitter.

“I don’t think this is game over for the rise of the fiduciary rule,” says Bill Winterberg, who runs industry blog “We’re seeing increased activity in the states themselves to own the regulation.”

Massachusetts, for example, charged Scottrade for unethical conduct last month. The St. Louis-based firm, which was recently acquired by TD Ameritrade, held at least two sales contests involving retirement assets since the partial implementation of the rule, according to state officials.

“I strongly urge the federal government to appeal this ruling, to provide certainty to customers and their advisors,” Secretary of the Commonwealth William Galvin stated in a press release, adding that his office “retains the authority to pursue investigations involving dishonest and unethical practices.”

While the Massachusetts case is the first-known enforcement action stemming from DoL’s revised fiduciary rule, other state and federal agencies may decide to take further action, says Winterberg. “We may now see some states take the lead,” he says. “This may allow more room for the SEC to step up, become vocal and provide further clarity and a clearer line between sales people and those providing fiduciary advice.”

For now, it is business as usual for many robos that were already acting as fiduciaries, Winterberg says.

“Will there be a material impact for online automated investment services?” Winterberg says. “Probably not.”

Without regulatory pressure, firms may turn toward the use of their own proprietary funds for retirement assets, Winterberg says, something that would have been scrutinized under the DoL rule. However, such moves are unlikely, he says.

There also could be a slowdown for developers of software and tools that were working with firms on fiduciary rule compliance, notes Jim Dowd, managing director at North Capital Private Securities Corp.

"It's disappointing," Dowd says. "I think some of the tools may have less of an audience because the need will not be as great from a compliance standpoint."

Whatever eventually happens to the DoL rule, robo firms will continue to fight for the best interest of their customers they say.

“Nobody expected this fight to be easy,” says Joe Ziemer, vice president of communications at Betterment, “and we will continue to advocate for the best interest of consumers.”

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Robo advisors Fiduciary Rule Fiduciary standard Retirement planning Regulatory relief DoL SEC Betterment