Revamped Fiduciary Rule Makes Brokers-Dealers Beef Up Tech Plans

Retirement savings are so sacrosanct for each one of us that it is frightening to even think of a loss in value.   Hugh Dawson and Larry Vickers*, best buddies since joining ACZ Corporation* together 30 years back, are both retiring today. Larry is aghast to find that he has only half the amount in …

by | October 14, 2016 | Wipro

Retirement savings are so sacrosanct for each one of us that it is frightening to even think of a loss in value.  

Hugh Dawson and Larry Vickers*, best buddies since joining ACZ Corporation* together 30 years back, are both retiring today. Larry is aghast to find that he has only half the amount in his retirement account compared with Hugh. Larry knew that their salaries were comparable and that they had similar lifestyles. They even invested in similar products. The only difference was that Hugh went to a different advisor.

As things stand now in the retirement industry, the current structure rewards more the ability to sell rather than the ability to provide sound investment advice. You and I, the customers, think that we are paying for the advice that we get, while in reality we are paying to buy those products that gives the highest commissions. Some of us like Hugh may turn out to be lucky, but the vast majority end up like Larry.

Figure 1: Weigh Forward

The US Department of Labor's (DOL’S) new fiduciary rule is aimed at reducing precisely this conflict of interest (see Figure 1) inherent in the industry by aggressively expanding the definition of “investment advice fiduciary,” thus making the advisor legally liable for the quality of his advice.

By moving a large portion of retirement accounts under a fiduciary umbrella, DOL has, in one stroke, made sweeping changes in how the retirement industry is regulated. It has forced a rethink on business operating models of investment advice providers, especially broker-dealers.

Way For-Ward For Compliance

With Phase I compliance expected by April 2017, it is high time firms start prioritising asks and plan for net new investments in requisite technologies. We believe there are four key areas where investments would be needed immediately.

These are:

1. Business Process Changes: Many loosely structured business processes around advice delivery and sales of retirement products will need to be redefined. Checks and balances need to be put in place for existing processes to ensure that information is adequately disclosed to avoid even a semblance of conflict of interest. For instance:

  • Approval workflows to ensure more stringent review of investment advices and products
  • Transaction approval workflows to eliminate prohibited transactions related to asset quality, anti-kickback, etc.

Investments in Business Process Management (BPM) tools or enhancements in existing BPM tools will be required by broker-dealer firms to build new processes and controls around existing ones to ensure compliance.

2. Separation of Investment Advice Workflows for Retirement Accounts and Others: Another area where firms could face challenges will be separation of initiation, execution and approval workflows between retirement accounts and other accounts. This is because the DOL rule currently applies only to retirement accounts, not to other accounts. Hence, managing them in a single workflow will drastically reduce efficiencies.

Broker-dealer firms have the option of either completely rebuilding retirement advice related workflows or split the existing workflows into two independent paths. Both options are equally technology intensive and requires investments in process technologies.

3. Enhanced Reporting and Disclosure Requirements: The new DOL rule requires retention, analysis and reporting of a much wider variety of data, some of which include:

  • A number of new disclosures to qualify for the Best Interest Transaction Exemption
  • Direct or indirect compensations enjoyed by broker-dealers

Enhancements are required, especially with respect to collection and processing of data never required previously. Additionally, increasing data retention requirements means that broker-dealers will also be required to invest in new age data storage technologies.

4. Revisit/Revise All Marketing and Investor Communication Messaging: The application of fiduciary standard of care means all info-commercials currently designed to advise and sell retirement products now need to be purely educational in nature.

This will mean a revisit of all marketing collaterals, Websites, print, audio-video and all other channels and rebuilding those where necessary.

Tech Aids to Standardise Advice

While DOL’S fiduciary rule leads to process changes and new disclosure requirements in the short term, in the long term it will drive industry standardisation. This means that if Hugh Dawson and Phil Smith approach a broker-dealer with a similar life story, they would both get standardised, prescription like advice. Firms that provide such standardised advice could get competitive advantage, both from a market perspective and from a legal and compliance perspective.

The two technology enablers for broker-dealer firms in their standardisation journey are:

Rob Advisors: Robo Advisors, especially when combined with Artificial Intelligence (AI) Platforms, can ensure that investment recommendations given by two advisors to potentially similar clients would be uniform and standardised. This will ensure a firm-wide standardisation of advice delivery.

Data Analytics: Analysis of unstructured data gathered via conversations between advisors and clients will help firms understand and differentiate consumer needs better, enabling enhanced profiling. The new DOL fiduciary rule is making way for large-scale changes in standard business operating procedures of most broker-dealer firms. Most legacy platforms neither have the flexibility nor the ability to deal with such sweeping changes spanning the entire business operation. 

Figure 2: Technology Track and Business Impact

New generation BPM tools, sharper analytics solutions, AI-driven automated advice solutions, unstructured data analysis platforms (See Figure 2) are some areas where investments would be required. Given cost pressures, firms can also mull about converting upfront Capex to operating expenses by using SaaS or cloud-driven applications and data landscapes. In a winner-takes-all market, early mover advantage is what the firms should aim for.

* Names, characters, businesses and incidents are fictitious. Any resemblance to actual persons, living or dead, or actual events is purely coincidental

By Rahul Sukesan, Principal Consultant in Securities and Capital Markets (SCM) IAG, Wipro Technologies.

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