Fiduciary Rule: Instant Gratification or Panic

If you haven't viewed Tim Urban's TED Talk about procrastination, I urge you to do so when you have a short break. He spins a tale of prioritization woe by referencing different parts of our brain. There is the Instant Gratification Monkey who tries to lure the Rational Decision-Maker from productive endeavors. This playful little fella holds sway until deadlines force the appearance of the Panic Monster. Someone then responds by pulling an all-nighter or two until the next crisis. As this illustrator and Wait But Why blog site co-founder explains, it's not an enjoyable way to manage tasks and seldom generates good results. It is far better to prepare in advance and schedule "must do items" accordingly.

Occasionally, planning ahead is difficult. Other times, it is easy. As Mr. Urban illustrates during his fifteen minute "eat your peas" presentation, there are signposts that indicate when acceleration is required. In his case, it was the appearance of his photo and bio in a TED Talks program that gave a date certain he could not ignore. For investment professionals who anticipate the eventual passage of the U.S. Department of Labor Conflict of Interest Proposed Rule into law, it is clear that significant change is afoot. Even if the exact final language or timing is unknown today, fiduciaries (now and later) may not want to sit back and wait.

Already there is talk of increased delegation to organizations that are willing to serve as either an ERISA 3(21) or 3(38) fiduciary, acknowledging that nothing eliminates risk completely. As Pension Resource Institute CEO Jason Roberts opines in an Investment News interview, "...while these offerings can limit fiduciary responsibility for advisers at the plan level, advisers could still be exposed at the participant level."

Others advance the idea that the so-called fiduciary rule will catalyze creative problem-solving, especially in the technology area, and that smart money is on first movers. See "Fiduciary Rule May Spur Product Innovation" by Andrew Welsch (Financial Planning, March 16, 2016). If you missed my earlier posts on this topic, see "Retirement FinTech Gets Another Suitor - Goldman Sachs" and "Financial Technology and the Fiduciary Rule."

Whatever path is decided on will require a minimum amount of time for contracting and setting up operations. Starting late could be costly for everyone involved. Lest you figure out a way to be able to succumb to the Instant Gratification Monkey (unlikely in the case of regulations and rules that require sufficient compliance), now is a good time for procrastinators to address priorities. Expending time right away may not be fun but is nonetheless necessary.

Retirement FinTech Gets Another Suitor - Goldman Sachs

No sooner had I written "Financial Technology and the Fiduciary Rule," an invitation to the Future of Finance 2016 appeared in my in-box with the call-out that "Technology is about to revolutionise financial services." (Note the British spelling for this Oxford conference.) Based on session titles, attendees will hear about topics such as how technology can:

  • Be "used to build trusting relationships with clients" and increase transparency;
  • Substitute for "expensive human intermediaries" to lower costs; and
  • Encourage the creation of "simpler and cheaper" insurance and savings products.

Increasingly, angels and venture capitalists are waking up to the fact that the global retirement marketplace is big and ripe for innovation. Earlier today, Goldman Sachs Investment Management Division announced its intent to acquire Honest Dollar. According to CrunchBase, this transaction follows a seed financing last fall to further build a web and mobile platform that allows small businesses to cost-effectively set up retirement plans. Expansive Ventures led that round that includes former Citigroup CEO Vikram Pandit and will.i.am, founder of The Black Eyed Peas musical group.

Yet another indication that investors see "gold in them thar health care and retirement plan hills" is a $30 million capital raise for a company called Namely. Its February 23, 2016 press release lists Sequoia Capital as the lead venture capital firm for this round, bringing its total funding so far to $107.8 million for this "SaaS HR platform for mid-market companies."

Interestingly, in articles about both Honest Dollar and Namely, the tsunami of complex regulations is cited as a reason why employers need help from financial technology organizations. With mandates growing and becoming more muscular, no one should be surprised if cash-rich backers write big checks to financial technology businesses. As Xconomy reporter Angela Shah points out, multiple start-ups are "trying to compete for the 80-plus percent who don't offer benefits."

There is no doubt that the competitive landscape is changing and will prompt more strategic soul-searching for vendors and policy-makers alike. I've listed a few of the many questions in search of answers as things evolve.

  • Will other large financial service organizations like Goldman Sachs swallow up smaller start-ups? If so, does that change the role of angels and venture capitalists?
  • If enough of these companies pop up to serve small businesses and self-employed persons, is there still a need for the product offered by the U.S. government - myRA?
  • Will the U.S. Department of Labor fiduciary rule, if passed into law, accelerate the formation and growth of financial technology companies? If so, how?
  • Will there be a need for more or fewer financial advisors as the financial technology sector grows?
  • Will individuals buy more insurance and savings products? If not, why not?

Life in financial services land will never be dull.

Financial Technology and the Fiduciary Rule

Whether the proposed U.S. Department of Labor so-called fiduciary rule becomes law this year remains to be seen. Many in the industry think its passage is nigh. Critics hope for a reprieve, asserting that costs are likely to outweigh benefits.

One oft-repeated concern is that small savers will be harmed if financial service companies decide to jettison accounts that fall below target asset levels. The Securities Industry and Financial Markets Association ("SIFMA") explains "Because they cannot afford a fiduciary investment advisory fee, they will instead be forced to solely rely on a computer algorithm known as a 'robo-advisor.'"

Financial technology enthusiasts will counter that a more automated approach to retirement planning is a good thing for big and small savers alike. Certainly the topic merits review for at least two reasons.

  • The use of machines has exploded in recent years. In her November 9, 2015 speech about technology, innovation and competition, U.S. Securities and Exchange ("SEC") Commissioner Kara Stein foretells buoyant growth with an expected $2 trillion in assets under management by robotized advisors by 2020.
  • There are central questions about the fiduciary obligations of a company that concentrates on algorithmic advising and money management. Besides seeking to contain model risk, there is a need, at a minimum, for a vendor to regularly review client objectives and constraints. Click here to access a white paper on this topic by National Regulatory Services.

A few weeks ago, a handful of venture capitalists and prominent angels announced a $3.5 million capital round for a financial technology company called Captain401. Its stated goal is to help small businesses streamline the creation and administration of 401(k) plans that the founders argue would be too expensive to offer without automation. A cursory review of the company website makes it impossible to know much about its business model, technology safeguards or compliance infrastructure. Nevertheless, the funding of this and other "Fin Tech" organizations augurs favorably for added growth in this area.

As the global retirement marketplace adapts to regulatory and economic realities, it will be interesting to watch (or perhaps lead) what unfolds in terms of innovation, service provider competitiveness, cost tiers and other outcomes that impact savers and those who have already retired.