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Regulation and Compliance > Federal Regulation > DOL

Joel Bruckenstein: DOL Rule Is Coming; Time for a Tech Update

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Advisors risk fines and lawsuits if they fail to comply with the Department of Labor fiduciary standard rule, and such compliance typically demands buying a slew of new and different technology. But postponing that while waiting to see if President-elect Donald Trump will repeal the rule — set to be implemented in just four months — is not a smart idea, warns Joel Bruckenstein, longtime expert on applied technologies for the financial services industry, in an interview with ThinkAdvisor.

Indeed, advanced technology has already disrupted financial services, and advisors who drag their feet to adopt will be unable to compete efficiently, especially in light of the DOL rule, Bruckenstein cautions.

The certified financial planner, who consults to firms on how to improve processes and workflows, was, until about three years ago, a practicing financial planner for decades. He is publisher of T3 Tech Hub and producer of the annual technology conference for independent advisors, the T3 Advisor Conference, in addition to the T3 Enterprise Conference.

In the interview, Bruckenstein, based in Miramar, Florida, talks about how the DOL rule will affect FAs’ practices both technology-wise and in bottom-line terms, and how the regulation’s tech requirements can be the catalyst to open new markets. He also gives guidance on key considerations in launching a robo-advisor.

ThinkAdvisor recently spoke by phone with Bruckenstein, who will hold the 2017 T3 Advisor Conference Feb. 14-17 in Garden Grove, California. Here are excerpt from our conversation:

THINKADVISOR:  How should firms proceed in acquiring technology to implement the DOL fiduciary standard rule? There’s speculation that President-elect Donald Trump will repeal it.

JOEL BRUCKENSTEIN: Considering that it’s supposed to go into effect next April, it’s pretty risky to bet that it will be delayed or abandoned: If you’re wrong, you’re leaving yourself open to fines and lawsuits.

How are firms proceeding that have already invested in the necessary technology?

They’re going to move forward with [the fiduciary standard]. Therefore, if a lot of your competitors will hold themselves out as fiduciaries and you’re not, that’s a tough place to be. Whatever the government does, [market] competition will move the industry closer to a true fiduciary standard — and that’s probably where we should be going anyway.

You wrote, in “Exploring Advice,” PIEtech president Kevin Knull’s new book, that “technology has disrupted just about every other industry … Now it’s our turn.” Please elaborate.

The DOL is a good example of that: Because of this regulatory change, you need different technology. Robo-advisors have already disrupted the marketplace. They’ve set client expectations much higher with things like self-servicing. It’s a better user experience from end to end.

Will the DOL rule help financial advisors’ practices, client interaction and, ultimately, profitability?

If you’re running more ethical practices that are more aligned with the client’s interest, it will be a good thing. Is it going to hurt margins for some products that folks have historically sold to end investors? Yes, it is. And some firms have to invest millions of dollars – from a workflow and technology perspective – to get compliant with the rule; so that’s certainly disrupting their businesses initially. But in the long term, it’s better for the end client.

How much new technology does the rule require broker-dealers to buy?

There are extensive changes that need to be made. Some firms have already spent millions in an effort to comply. But if you’re an independent registered investment advisor, you’ve been operating under a fiduciary standard; so the cost and disruption from a technology standpoint will be minor. What you’re not doing, though, is documenting enough of the rollover process from a corporate [retirement] plan to an IRA. So you’ll need some additional documentation and disclosure for that.

What capability must the technology have in order to comply with the rule?

Broadly, you’ll need to automate and standardize workflows. You’re going to need to document everything you’ve done [for the client], which, to a large extent, hasn’t been required. Very few firms have that [procedure] in place across the board now. First, you must do an evaluation of where the client is currently and get a holistic picture of their finances. Then you need to make a determination that what you’re recommending is in the client’s best interest. In many firms, all those workflows don’t exist today because they’re not required. One of the persistent arguments in opposition to the rule is that if commissions are eliminated, it won’t be cost-effective to service smaller accounts because, for one, the overhead will be too high.

If you automate, it won’t be. Look at what some of the larger broker-dealers have done, including LPL [Financial]: they’re rolling out what essentially are robo-advisor solutions that are very cost-effective and well suited to service smaller [accounts].

So you don’t see traditional advisors leaving behind mass-market clients because of the rule?

Traditionally, advisors haven’t served the mass affluent: They’ve served the sweet spot: clients with $1 million to $5 million, or even $10 million, in AUM. But if they automate their practices and [become] more self-service, they can move downstream and open up a brand-new market.

Would that be worth it?

The number of potential mass affluent clients out there is certainly large, and they’re not being well served now. They could be serviced better, and profitably, by independent advisors acting as fiduciaries. In the other direction, some advisors are becoming more like multifamily offices, and offering sophisticated tax and estate planning. So there are ways to insulate your practice and maintain margins. More technology and better workflows pretty much apply across all firms.

How are you defining “self-service”? Robo advisors?

A digital advice program that’s advisor-driven is one example. But it could be something as simple as self-service client onboarding.

What’s the biggest challenge facing advisors today, and where does technology fit in?

The business is in a transformative stage. There’s a generational shift: The average age of the RIA and CFP is over 55, and a new generation of advisors is coming in.  The same [demographic] shift is occurring among [current FAs’] clients, who are [aging too]. The new generation of clients has different expectations from the current one. They grew up with technology and embrace it. And they wouldn’t have it any other way.

But many older advisors aren’t technology-minded.

Historically, financial advisory firms have been slow to adopt technology. But with the advent of consumer-facing technologies over the last several years – like smart phones and robo advisors – [people’s] expectations are rising, including what financial advisors provide.

How does that affect FAs’ bottom line?

To compete effectively, advisors need to be more efficient than they’ve been – and I don’t understand how you do that without better and more prolific use of technology. With the DOL rule, there’ll be margin compression, which comes with transparency and competition from low-cost investment alternatives. 

It seems that there’s some controversy in advisor attitude about adopting new technology.

For people of a certain generation, it may be controversial. But for millennials, it’s not controversial at all. They’re technology mavens.

So in that sense, there’s a parting of the ways between the older and new generations of advisors: one readily embraces technology; the other is wary of it.

The ones that are wary of it are slowly dying off. There won’t be many of them around 20 years from now.

Where does potential obsolescence of both hardware and software come in?

Obsolescence is always a challenge and something you have to plan for. Certainly, the pace of technological change has been accelerating over the last decade, and we see no signs of that slowing down. There’s is no technology you can buy that’s not going to need to be replaced at some point in the future. The question is: How fast? What’s the robo advisor role, in general?

They have a couple of roles. One is a replacement for certain [types of] mutual funds, as well as some other [traditional] solutions for small investors. With a robo advisor, a middle-of-the-road investor with moderate risk tolerance can get a customized solution with regard to asset classes as well as some basic tax management. A lot of those clients will eventually gravitate to something like that.

What’s another robo role?

One could argue that, for a lot of investors, a robo advisor is a better solution than target-date funds. It’s an all-in-one solution, very easy to maintain and a lot more user-friendly. This [would be] an advisor-assisted model where much of the investment side is automated but with some personal advice on that and other aspects of the client’s finances. It lowers the cost of investing, lowers [firms’] overhead and makes things more efficient. It  therefore allows advisors who engage with clients to spend more time on real value-added services.

What are the top considerations in implementing a robo?

You want to integrate it with your current custodian or broker-dealer. And you have to figure out how it integrates with your existing business model — if you want it to. If not, you have to figure out what the robo’s business model is; for example, will it be a stand-alone service that supplements your existing services? Another question: Will it have the same or different branding as your current offerings?

What prompts firms to ask you to evaluate their processes or systems?

Usually there’s a particular pain point that people think they’ve identified; for instance, they’re having trouble with portfolio management software. But the majority of the time, when I get into their office, I identify one or more problems that are more pressing than the one they called me about.

What’s advisors’ biggest tech issue?

Their greatest need is to become more organized: 80% of firms don’t have a technology plan. And most of them are not strategic about the way they approach technology.

They need a strategy to purchase tech?

Yes. Some advisors, for example, go out and buy CRM software without considering what their needs are, whether that product is appropriate for their firm or if it integrates with other software they’re currently using. If the product can’t talk to your other software or to your broker-dealer’s or your custodian’s, or if it doesn’t meet your needs as a firm, it’s not a good choice – even though it might be good software.

Does this mean the product won’t operate?

That’s probably true. Or, if it works, it works in a very suboptimal manner.

Back to the DOL rule: Safe to say that many advisors are upset about it. Should they be?

You can either fight progress or adapt. I think that people who adapt are going to be very happy and those who want to stay rooted in the past will probably be upset but not very successful.

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