Betterment, the country’s largest independent robo-advisory that now oversees more than $6 billion in assets, placed full-page ads in Sunday’s New York Times and Monday’s Wall Street Journal imploring readers, investors, and President-Elect Donald Trump to get behind the Department of Labor’s fiduciary rule.
The Times ad, featured in the paper’s business section, was in the form of a letter from Betterment’s CEO and founder, Jon Stein, to Trump.
“You said in June that under a Trump presidency, the American people will finally have a president that will fight for them and protect them,” wrote Stein in the ad. “Now’s the time,” he added.
The Labor Department’s fiduciary rule, which requires advisors to IRAs and 401(k) to provide investment advice in the best interest of retirement savers, “is under attack,” Stein tells Trump.
“This rule is worth your time and attention, and worth your support,” said Stein. “We hope that you will stand on the side of America’s 75 million retirement savers, not the firms with deep pockets who are lobbying you to protect their bottom line, instead of their customers’ interests.”
Joe Ziemer, vice president of communications for Betterment for Business, the record-keeping arm of the firm that administers 401(k) plans for 300 plan sponsors, said the purpose of this week’s ad initiative was twofold.
“In light of the recent election there’s been increased chatter on how the rule will be impacted,” said Ziemer in an interview. “We wanted to make sure our vocal stance on the rule was known to the public, and we want to use the opportunity to raise awareness of what we do.”
The ad in The Journal, which is not a letter to Trump, implores readers to ask if their existing investment advisors are giving non-conflicted advice.
Betterment, based in New York, did not the need the DOL’s rule to establish its conflict-free business model—it has done so since the company’s inception in 2012, the ad says.
“Do you want your money with a company that has always put its customers’ interests first? Or a firm that had to be forced to do it?” the ad rhetorically asks.
Fiduciary rule good for robos
Betterment and other independent providers of automated investment platforms, the so-called robo-advisors, have been vocal supporters of the fiduciary rule.
Robo-advisors deliver various levels of customized investment strategies. On Betterment’s retail platform, assets are invested in low-cost, non-proprietary exchange traded funds, and routinely and automatically rebalanced via algorithms to comport with individual investment goals.
Many industry analysts speculate automated platforms will benefit from the fiduciary rule, which will increase traditional firms’ fee disclosure requirements. That, in turn, could bring attention to the value proposition of low-cost automated platforms.
Critics of the rule charge that its allegedly onerous compliance requirements will price small investors out of the retirement advice market.
In testimony before Congress prior to the rule’s finalization, Labor Secretary Thomas Perez argued that technology and online investment tools could deliver non-conflicted advice to smaller investors at fees lower than existing industry standards.
Betterment, other robos won’t need BIC Exemption
The Labor Department gave a further endorsement for automated investment providers in a recently issued frequently asked questions memorandum.
In the FAQ, regulators specified that providers like Betterment will be able to continue to operate without using the fiduciary rule’s Best Interest Contract Exemption.
The BIC Exemption includes an extensive set of disclosure requirements advisors will have to use when selling commission-based investments. Level-fee fiduciary advisors will also have to use a form of the BIC Exemption when recommending investors roll over 401(k) assets to an IRA, and when transitioning investors from commission-based to fee-based accounts.
According to the FAQ, the DOL doesn’t think investors will need the protections of the BIC Exemption when using automated platforms, because the market for robo-advice is “evolving in ways that appear to avoid conflicts of interest.”
That means a company like Betterment will not have to invest in new compliance, education and communication initiatives.
It also means a provider like Betterment will not be exposed to the provision of the BIC Exemption that allows investors to bring class-action lawsuits for breach of contract.
Where does Trump stand?
During the inaugural leg of Donald Trump’s thank-you tour in Cincinnati last week, the President-elect alluded to several of his administration’s policy initiatives.
Rolling back the fiduciary rule was not one of them, though he did tell the raucous crowd that “regulations” are “totally out of control.”
Congressional Republicans—not the least of which is House Speaker Paul Ryan, R-Wisconsin—have almost universally voted their disapproval for the fiduciary rule in the past year.
Should they take action against the rule and decide not to fund its implementation, they will have to do so quickly. The rule’s first implementation date is April 10, 2017. Congress will be wrestling with key Trump sdministration initiatives in the early days of the 115th Congress, including repeal of the Affordable Care Act, and nominating a justice to fill the vacant seat on the Supreme Court.
The incoming administration’s reticence on the fiduciary rule may be good news for fiduciary proponents, says Seth Rosenbloom, associate general counsel for Betterment for Business.
“The fact that there hasn’t been a statement from the Trump team gives us hope,” said Rosenbloom. “For one, we think that means we will have an opportunity to be a part of the discussion. As April 10 draws closer, it’s an open question whether or not the administration or Congress can stop the rule. Even if there are powerful industry forces pushing against the rule, Congress has a lot to get done. It all comes down to what the Trump administration’s priorities are.”
While Betterment will continue to lobby that the rule be enforced as it is written, Rosenbloom doesn’t fear all will be lost if that is not the case.
“Part of what we are doing with these ads is encouraging people to ask the questions that should be asked of all providers,” he said. “Hopefully this long process will have succeeded in focusing investors on the differences between providers, regardless of what happens to the rule.”
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