Plus, what to expect in 2016 from the SEC on a fiduciary rule and the Labor Department regarding a conflicts rule.
What were the biggest stories for investment advisers in 2015? The ones that had both immediate and lasting significance for the public, advisers and the marketplace? Three stand out to me as particularly momentous and potentially transformational for the advisory profession.
The first is as obvious as it is controversial. The Department of Labor's conflict of interest rule has persistently captured headlines since January, when an internal White House memo on the cost of conflicted advice in ERISA and IRA accounts was leaked to the press.
When the Office of Management and Budget took less than half of the customary length of time to review the rule proposal and the president came out with strong commentary on protecting the retirement savings of workers, it served as a declaration by the administration that this would be a top priority.
Since the rule's release, a deluge of comment letters (3,131) to the DOL, approximately 100 meetings of interested groups with the regulator and nearly four days of hearings speak to the strong emotions generated within the industry both for and (mostly) against the proposal. With the comment period ended on Sept. 24, all attention has turned to the calendar. Is there enough time to put the final rule in place before the 2017 inauguration of the next president? Given the steady stream of whack-a-mole Congressional delay tactics the administration continues to deal with and the likelihood of industry litigation to try to stop the rule, this story is a virtual lock to be front and center throughout the coming year.
A related sub-story that will become more manifest in 2016 is the Security and Exchange Commission's progress on fiduciary rulemaking. In March, the SEC broke nearly five years of silence with a concrete announcement by Chairwoman Mary Jo White that the commission was indeed interested in moving forward with a uniform fiduciary rule for brokers and investment advisers. Just this past week, the SEC indicated that it is targeting October 2016 as a possible release date. Maybe, just maybe, this will actually happen. In my view, the odds go up dramatically if the DOL conflicts Rule comes to pass as expected in 2016.
For the second milestone event from this year, I move from regulation to litigation. The Supreme Court's May decision affirming the fiduciary duty to continuously monitor ERISA plan investments was extremely important. In Tibble v. Edison, the court held that ERISA's underlying foundation of trust law imposes a “continuing duty to monitor trust investments and remove imprudent ones,” undercutting the defendant's argument that monitoring ended with ERISA's six-year statutory limitation on violations. The fiduciary duty to monitor is fundamental. Had the high court not upheld that duty, it would have been a huge surprise and terribly damaging to investor protections. This story would have been bigger — not in a good way — had the court ruled differently.
My third pick may be the most transformative development of the year, and is more of a story in the making than the first two topics. It is what I will refer to as “algorithmic prudence." While the robo-advice phenomenon has been capturing headlines throughout the year, I would draw an important distinction between computer-based (robo) advice as a business model versus the rapidly growing impact that technology is having on the advisory profession as a whole. I have serious doubts about the ability of pure robo-advice (i.e., fully automated advice) to consistently fulfill the fiduciary duty of care in a world of limitless diversity of personal circumstances.. However, I believe technology will reshape how human advisers will do their jobs in the future and the skills that will be required of them.
Product costs and features are becoming more transparent in large part because convoluted disclosures can be deciphered electronically and benchmarked. Similarly, big data from custodial, regulatory and other data repositories can be aggregated and processed to uncover errors, systematic abuse, trends and all kinds of intelligence that can be applied to make better business, compliance and investment decisions. Increasingly, powerful algorithms will perform complex and objective analytical functions like asset allocation, product due diligence and sophisticated reporting and benchmarking.
Algorithmic prudence will free — or force — advisers to concentrate on higher-level cognitive skills and address client-specific circumstances that are nuanced yet critical to serving clients' best interests. Technology will facilitate the fulfillment of the fiduciary duty of care at a fundamental level but financial professionals generally will be needed to interpret and properly apply the wealth of information technology can produce.
In short, advisers will have to become even more skilled. They either will need to specialize or be able to provide comprehensive advice, such as through financial planning. Technology will take care of commonplace financial matters considered in isolation.
Looking back, regulation and litigation have been at the forefront of promoting fiduciary conduct and the professionalization of advice. Looking ahead, technology is likely to take the lead in achieving these same outcomes at a much more advanced level.
Blaine F. Aikin is chief executive of fi360 Inc.
