The years of regulatory tussle and tens of millions spent in lobbying dollars have produced a consistent claim from opponents of the Department of Labor’s proposed fiduciary rule: Low income Americans and small-value retirement account holders will be priced out of the financial advisory market.
Christopher Jones calls that argument a red herring.
The chief investment officer of Financial Engines, which advises on more than $110 billion in 401(k) managed account assets and has relationships with 670 plan sponsors, says the Sunnyvale, California-based firm proves as much.
Credited by some as being the robo advisor before there were robo advisors, most of the sponsors offering Financial Engines’ managed accounts are of the mega variety; the average sponsor-client has $1.5 billion in plan assets.
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The DOL fiduciary rule is bound to disrupt some wealth management units.
But the average participant is of relatively modest means. According to the firm’s most recent 10-K filing with the Securities and Exchange Commission (SEC), median assets for enrollees in managed accounts is about $54,000.
“We think the DOL is taking a big step forward,” said Jones, who has been with Financial Engines since its founding in 1996. He expects the rule’s affects to be “profound” and “long-lasting.”
Jones told our sister site, BenefitsPro, that today’s version of Financial Engines mirrors co-founder and noble laureate William Sharpe’s original vision, which was to leverage technology to bring low-cost, institutional grade advisory services to the common investor.
Sharpe’s vision to build an advisory model free of conflicted advice was conceived at a time when the “vast majority” of financial advice was conflicted, according to Jones.
“What the DOL is doing is a reflection of trends that have been going on for some time,” he said, underscoring that Financial Engines has served in a fiduciary capacity since its inception.
Notwithstanding his support for the DOL rule, Jones, like all stakeholders, is eager to see the finalized language, which is expected to be released in a matter of weeks, if not days.
“With any regulatory change of this complexity — and this one is going to be complicated — the devil is in the details,” he said.
“Inevitably, there will be some things that won’t be perfect. Our hope is that the final rule minimizes the potential for unintended consequences,” explained Jones.
Principal among Jones’ concerns is how the rule will differentiate between education and advice, the former being critical to the firm’s managed account model.
He remains confident DOL will adequately consider Financial Engines’ and other stakeholders’ concerns with language in the proposal’s education carve-out, which numerous comment letters from plan providers, advisors, and ERISA experts criticized for not being specific enough.
But in the big picture, Jones doesn’t expect the final rule to have a significant impact on Financial Engines’ business.
Some providers of financial advice may not be so fortunate. In attempting to hold all advisors to IRAs and 401(k) plans with less than 100 participants to a fiduciary standard of care, the proposed rule clearly favors fee-based models of compensation over commission-based models.
While the proposal does not prohibit commission-based sales, its Best Interest Contract Exemption is expected to require extensive disclosure requirements on advisors that market commission-based services.
Many stakeholders have said that complying with the BIC exemption will be costly, and force commission-based accounts to a fee-based model, which would be assessed annually.
Opponents of the DOL have argued that could end up costing some investors more money over time. Jones doesn’t buy that argument.