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 While it is not clear how much money is at risk of leaving bigger
firms because of the new rule, industry trade groups say the costs
of compliance will be high.
Individuals with meager retirement savings or small businesses who
offer 401(k) plans could get the boot from big brokerage firms
because the revenue they generate is not worth the expense.
The fiduciary rule, aimed at ensuring that brokers put clients' best
interests ahead of their own profits when advising on retirement
funds, was released last week and requires all retirement plan
advisors to be completely compliant by the end of 2017.
Roboadvisers like Wealthfront, Betterment and Aspiration said they
are in a position to scoop up business that has been tossed aside by
larger brokerage firms.
"To the extent that this rule starts undermining the business models
for incumbents, it absolutely opens the door for innovators," said
Andrei Cherny, chief executive of Aspiration.
At Betterment there is no minimum balance required, while Aspiration
clients determine their own fees based on what they think is fair.
Wealthfront's minimum balance is $500.
Roboadvisers have lower costs and offer smaller fees than
traditional firms partly because they do not have to pay an army of
brokers to sell their products.
The Labor Department predicts the broader wealth management industry
will face up to $31.5 billion in additional compliance costs due to
the fiduciary rule over the next decade.
A Department of Labor official said roboadvisers must comply with
the rule just as human advisers do. But these firms already adhere
to a fiduciary standard set by the U.S. Securities and Exchange
Commission, which means costs and fees may not go up in the same
way.
Arjun Saxena, a consultant who deals with wealth and asset
management firms at PricewaterhouseCoopers, called the fiduciary
rule "a big win for digital and online advice."
"Many of the larger firms do have a great deal of smaller clients,"
said Saxena.
Some traditional firms may end up partnering with roboadvisers to
offer low-cost services instead of pushing clients out the door, he
added.
Mike Sha, chief executive officer and co-founder of roboadviser
SigFig Wealth Management LLC, said roboadvisers are keen on those
kind of partnerships as well.
"One way to drive up scale is to partner with traditional financial
institutions that already have a trusted name and brand," he said.
FIDUCIARY SHIFT
When the Labor Department first started crafting its fiduciary rule
in 2010, roboadvisers were barely a gleam in the industry's eye.
Although the idea has been around for more than a decade, it has
only gained traction the past few years.
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The industry now oversees $100 billion in assets, or about 3 percent
of the wealth management industry, according to Deloitte Consulting.
By 2025, Deloitte predicts the industry will manage between $5
trillion and $7 trillion, representing 10 to 15 percent of U.S.
retail assets under management.
Betterment and Wealthfront are the most prominent roboadvisers, and
came on the scene in 2010 and 2011, respectively. Since then,
competitors like Aspiration and Vanguard's Personal Advisor Service
platform have also sprung up. Firms including Charles Schwab, Bank
of America Corp, BlackRock Inc, and Goldman Sachs Group have either
acquired stakes in or developed their own in-house robocompetitors
as well.
The wealth management industry has broadly gravitated toward a
fiduciary standard in recent years, driven by client preferences and
fee pressure as much as expectations that rules would get stiffer.
The biggest wealth management firms inside Morgan Stanley, Bank of
America, Wells Fargo & Co and UBS AG have been shifting client
assets from "transactional" brokerage accounts, which generate fees
by trading frequently, to fiduciary accounts that charge a flat fee
regardless of how often they trade.
Firms hit hardest by the Labor Department rule are smaller ones that
still have a healthy number of transactional accounts, like LPL
Financial Holdings Inc, analysts said. Insurers may also face
pressure when it comes to selling certain annuities that face
restrictions.
A spokesman for LPL Financial said the firm will not be one of the
hardest hit and about 40 percent of overall assets are fee-based,
and roughly two-thirds of new assets are fee-based.
(Additional reporting by Elizabeth Dilts in New York, and Lisa
Lambert in Washington D.C.; Editing by Lauren Tara LaCapra and Chris
Reese)
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