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How Robo Tools Can Help With DOL Fiduciary Compliance

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Could digital advice tools solve all of advisors’ fiduciary woes?

John Wise, CEO of InvestCloud, makes the case that the Department of Labor’s fiduciary rule could be a potential lifeline for robos – largely because digital advice tools can help manage compliance with the new rule.

“Automating advice is the best thing you could possibly do because you’ve got a whole history about what did you select, what was your risk profile at this time,” Wise told ThinkAdvisor. “So you’ve got the history of advice and consistency. Computers are one thing, they’re very consistent.”

In fact, some investment product manufacturers like BlackRock and Invesco have recently acquired digital-delivery platforms to quickly support pending DOL policy.

The Office of Management and Budget has completed its review of the Department of Labor’s rule to amend the definition of fiduciary for retirement advice, according to its website. And it is expected that the DOL will release final regulations on Wednesday.

InvestCloud, which provides cloud-based office solutions for a variety of investment advisors, was launched in 2010. It took nearly two years to build using a patented technology called “programs writing programs.” PWP radically reduces the amount of time and cost it takes to build applications because rather than using programmers writing code, it uses, well, programs. PWP also allows InvestCloud to react quickly to changing regulation.

“When legislation changes, you can react to those things very simply because we’re using [programs writing programs] rather than thousands of programmers,” Wise told ThinkAdvisor. “A lot of software companies, when legislation changes, they have to start rewriting code. That’s a nightmare for them, takes them forever.”

According to Wise, a single business analyst can do in days what would take a group of programmers weeks or months to accomplish at a traditional software company.

InvestCloud took on its first client – “a small hedge fund,” Wise said – in 2012, and today it has 660 clients and $1.5 trillion in assets in its cloud.

InvestCloud’s clients include wealth advisors, large family offices, pension funds and endowments, and hedge fund administrators and independent wealth platforms, and range in size from small startup companies to a manager with $47 billion in assets under management.

While InvestCloud itself is not a robo-advisor, it provides the tools for advisors to build their own robo investment platform in a short period of time.

“We’re not a gold digger ourselves but we’re supplying the shovels and picks to all the gold diggers so you can build advice platforms very inexpensively and actually automate,” Wise said.

Advisors can give their clients a risk tolerance questionnaire and allocate their assets into a portfolio of investments chosen by the advisor. InvestCloud will not suggest what those investments should be.

Advisors can create their own portal by using any number of ready-made modules, or applets. These applets cover everything from client automation to document management, portfolio management, client communications and a CRM system. “Each part of the system is modular; they can just take on the client automation piece if they like,” Wise told ThinkAdvisor, adding, “It’s exactly the same as going to the Apple Store to select which apps you want to put into play and how you want to put them into play. We’re multi-device so it doesn’t matter what devices your clients use.”

According to Wise, digital advice tools can help show advisors acted solely in the best interest of the investor. InvestCloud built a technology, called “multi-question, multi-answer,” that shows just that.

“What this does is enables the financial institutions themselves to decide what the right questions are and with those permutations this is the right product for you,” Wise said. “They’re in control of what they’re giving you. Any fiduciary or compliance issue you might have, they can control those things. So if you say no tobacco stock, then it can know you’re not going to get any tobacco stocks.”

As Wise points out, digital tools also make a great system for fiduciary reporting because every point is recorded and the advisor or the client can always get access to all that information.

“We do two things: It’s stored in the digital warehouse that is at the center of the platform. That is stored forever,” Wise said. “The other thing is we send them a PDF record about all those decision points that they’ve made. So they have their own copy of it as well.”

Wise said that information stays in their system forever.

“Not like a lot of banks where if you go back seven years and your bank won’t give [the statement] to you online,” Wise said. “In our systems, everything is stored. We never, ever destroy. You can’t destroy anything in our system.”

Many around the industry have estimated that the time needed and the costs associated to comply with the new rule will be brutal. Meanwhile, InvestCloud could have a new client up and running in its system in two to three months.

“Right now, we’re in a deal with one of the world’s largest banks, and it just shows you that they can’t do it because it’s going to take them too long and the cost of doing it,” Wise told ThinkAdvisor. “Seriously, one would be very pushed to get there on time, and the cost of doing so would be insane.”

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