The more comprehensive the view of client finances, the more prudent the advice.
We are moving toward a world in which account aggregation will become a necessity for the financial advice industry. Let me explain.
Whether it's in January 2018 or July 2019, or at some other date down the road, the Department of Labor's fiduciary rule will go into full effect, obligating financial advisers who receive compensation for advice on retirement accounts to act as fiduciaries and prioritize the best interests of their clients over their own.
It remains to be seen whether or not class-action litigation, the proposed teeth behind the rule, will be watered down or removed completely, but there is likely to be an enforcement mechanism of some kind in place. While compliance around the fiduciary rule remains hotly contested and unsettled, it is pretty clear that the fundamental principle of the rule — that retail retirement investors should be protected from financial harm stemming from biased advice — will endure.
The fiduciary rule, which calls on advisers to "give prudent advice that is in the customer's best interest," is, likely on purpose, vague. By intentionally making the rule's language vague, the regulators are giving themselves flexibility with enforcement and are not drawing a clear line in the sand for less scrupulous advisers to toe.
However, the lack of explicit definition of what the customer's "best interest" is makes compliance and enforcement tricky. How can advisers prove that they have been acting in the best interests of their clients? I think that an adviser who can point to meaningful efforts to understand a client's complete financial picture and advise accordingly will find that he or she has little trouble complying with the rule in the eyes of the regulators.
In a post-fiduciary rule world, account aggregation, which enables advisers to centralize a client's held-away account data, will, therefore, become the foundation of these meaningful efforts. The more comprehensive the view of a client's financial life, the better the case that can be made that advice is prudent and client interests are prioritized. Aggregation can provide insight into a client's finances on two levels that pertain to long-term financial planning: vertical and horizontal.
Vertical insight offers a complete view of a client's financial accounts. This is a straightforward understanding of a how a client's assets and liabilities are distributed. This perspective is the cornerstone of account aggregation. It is the data.
Horizontal insight on the other hand adds breadth and contextualizes the vertical view of a client's financial life by offering an understanding of performance, risk exposure, tax implications and spending patterns. It is the information that can be derived from the data. For example, spending patterns, gleaned by parsing transaction histories, can enable advisers to work with clients on better budgeting behavior, which can ultimately boost investable income.
By coupling these two views together, advisers can develop a rich understanding of their clients' entire financial lives, which in turn can inform the type of comprehensive financial planning necessary to best serve their clients' interests and for clients achieve their retirement goals.
While aggregation seems likely to become a necessity from a compliance perspective, data suggest that it already is one from a client demand point of view. Ninety-five percent of advisers surveyed reported that their clients ask for advice on held-away accounts, with 76% of investors from another survey indicating that the ability to get a holistic view of their accounts and financial history was a key factor when choosing a financial adviser. Despite this demand, only 52% of financial advisers offer aggregation technology.
New regulations, shifting client demands and expectations, and technology are bringing significant change to the financial advice industry. Data-informed decision-making and planning underpin its future in terms of business growth, the type of advice that is provided, and compliance.
The better advisers know their clients, the better they can serve them and the better that they can demonstrate that advice is prudent and in the customer's best interest. Aggregation is the means to that end. Not only will the technology enable advisers to provide more holistic financial planning but it will also serve as an effective compliance mechanism once the DOL fiduciary rule is fully in place.
Whenever that may be.
Lowell Putnam is co-founder and CEO of Quovo.
