In the middle of an evening news program comes a commercial break. A burly, middle-aged plumbing contractor dressed in jeans and a tool belt strides toward the camera, stern-faced and clutching architectural plans. “You want to make it in small business,” he says, “treat your employees right. I’m proud I offer my people a 401(k) plan.”
The plumber grimaces. “These new regulations they’re pushing in Washington — they’re not right. They’ll make it much harder for my employees to get information on our 401(k). Fees and costs will go up. That will make it harder for us to keep our plan.”
The camera zooms in for a close-up. Shaking his head in frustration, the contractor concludes, “Washington. Messing up our 401(k). As if small business isn’t hard enough already.”
Welcome to the campaign the financial services industry is waging via television, the web (he’s there too at SecureFamily.org) and e-mail, in hopes of convincing the public that the new fiduciary standard rule, proposed by the U.S. Department of Labor on April 14, is bad for consumers of retirement savings advice — the very group intended to benefit from the regulation.
This campaign, designed to kill the chances that stockbrokers and insurance salespeople would have to abide by fiduciary standards when presenting themselves as financial advisers, has taken on David-and-Goliath proportions. That is because most proponents of the rule are generally not in the for-profit world and have tiny budgets. But there may be good news for those in favor of consumer protections: Increasingly, more sophisticated technology is enabling less conflicted, less costly advice for the masses.
“There’s a crying need for companies to provide high-quality, objective advice,” says Christopher Jones, CIO of Financial Engines, an online advisory firm based in Sunnyvale, California, and known as the original, automated-advice brainchild of finance guru and co-founder William Sharpe. “Advice can become more cost effective when generated by technology that is based on complex algorithms, mathematics and data, and then delivered by a human being,” explains Jones. “People want to talk to someone.”
The financial services industry has sold legislators on the idea that, as the contractor in the commercial opines, somehow small investors will lose access to advice if they can’t be sold products such as IRAs from mutual fund call centers and insurance companies.
“A lot of these arguments are incredibly cynical, to say the only way you can give advice is conflicted advice,” says Jones. “They’re trying to justify a conflicted, broken system.”
“It’s ironic at the very least, because insurance sales have been at the source of a lot of very opaque pricing, very robust fee structures that are completely impenetrable, even to skilled professionals,” notes Robert Dannhauser, head of global capital markets policy at the CFA Institute in New York. “It’s ironic coming from an industry that’s been plagued with transparency issues and honest pricing of the product,” he adds.
The fiduciary standard rule is intended to revise the Employee Retirement Income Security Act (ERISA), the omnibus federal pension regulation first passed in 1974. Now more than 40 years old, the original law did not foresee the movement away from pensions and into individual retirement plans and 401(k)s, for which millions of participants seek unbiased advice without knowing whether they are receiving it. That is because insurance company salespeople, registered representatives and stockbrokers have come to call themselves financial advisers yet are not legally held to the same standard of customer care as are registered investment advisers. The new rule intends to even the playing field.
An earlier fiduciary rule was proposed and shot down in 2010. Given the bill’s mostly Republican opposition in Congress, many doubt the rule will survive its second iteration. But some observers believe that, even without a new rule, the evolution of the financial industry will ensure that a less conflicted advice model will ultimately triumph. The main driver of this change, as in so many other industries, will be technology, that great disrupter. “Technology is coming to the personal advice space and has the potential to scale and provide a level of support and advice to investors that is unconflicted or less conflicted and at a price they’d be willing to pay,” explains Dannhauser. “Absent the political pressure, that’s how I would expect this to play out.”
“We’re going to see some great innovation that lowers costs. All the online models offer reasonable approaches to investing money, especially for average investors, with very low or no minimums,” says Sheryl Garrett, who oversees a network of 300 registered investment advisers in the Eureka Springs, Arkansas, office of the Garrett Planning Network, a group of fee-only financial planners. These market forces are compressing fees and commissions, causing them to come down, she observes.
The growing popularity of robo-advisers that use a more limited number of investment models than Financial Engines’ custom algorithms and don’t interact on the phone — and instead offer online advice through companies like Betterment and Wealthfront, each with about $2 billion in assets — is partly driven by Millennial investors who grew up interfacing with technology. In a sign of the changing times, on August 26 BlackRock, the world’s largest asset management firm, revealed it had acquired FutureAdvisor, an online advisory with about $600 million in assets under management. On September 11 Betterment announced that it was expanding its retail advisory business to the 401(k) market.
Whereas it’s still too soon to know if the financial services industry will beat down the Department of Labor’s effort to level the advisory playing field, technology has the potential to force a change that no industry can stop. “It’s coming, and it’s inevitable it will dominate,” says Financial Engines’ Jones.
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Follow Frances Denmark on Twitter at @francesdenmark.
