Robos and the DOL Ruling: The Future of Wealth Management

Roboadvisors are among the hottest trends in fintech — or invest tech, if you prefer — but a new proposed ruling from the Department of Labor has raised questions, specifically: Are roboadvisors fiduciaries?

Robos, which provide personalized advice based on algorithms to clients without any need whatsoever for human interaction, seem to fall into a gray area with the Department of Labor’s new ruling, which those in the financial service sector have been hearing chatter about for some time. (c) Can Stock Photo

“As far as I understand, it’s still not clear what robos are classified as; it’s not clear yet whether an algorithm can be classified as a fiduciary,” said Laura Varas, whose data and consulting firm HeartsandWallets provides consumer-driven insights for the financial services industry. “However, for banks, giving customers access to this Betterment-type robo is really a great opportunity.”

The DOL ruling was created regarding “fiduciary” standards, and has been a source of unease for companies that work with financial advisors for some time, with companies like Envestnet-Yodlee stating in its second quarter earnings conference call that “the specifics of the DOL rule had been a question and a concern until the final rule was announced.”

The company, which had a generally favorable second quarter, also noted the advisors and experts who tend to both improve themselves and the outcomes of their clients were those who “recall the Kasparov Principle, which posits that experts plus machines deliver better outcomes than experts or machines can deliver alone.”

The hybrid model of roboadvisors combined with a human touch is what’s generally been seen to appeal the most to clients, according to Envestnet.

According to Joseph Mrak, CEO of technology solutions provider FolioDynamix, roboadvisors are ideally suited to deal with small entities, exactly what the DOL ruling was crafted to protect.

“If [financial services] have to put in all of the DOL stuff in place anyway, they might as well keep it consistent,” said Mrak. “From my perspective, if a client has provided their information [to a robo] there should be a fiduciary involved in the process.”

It remains unclear how the rule will ultimately regard roboadvisors, but the uncertainty should lend credibility to the hybrid approach pursued by Envestnet.

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