As the Department of Labor's fiduciary rule proposal was being discussed last year, robo-advisors were hailed as a potential solution to bring low-cost fiduciary advice to consumers. Labor Secretary Perez explicitly touted companies like Wealthfront as being a key part of the fiduciary future. However, it turns out that the final fiduciary rule has created a significant problem for several robo-advisors like Schwab and Blackrock's FutureAdvisor, that use the platform to distribute their own proprietary products.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at what the final DoL fiduciary rule really said about robo-advisors, how robo-advice must be delivered to satisfy the Level Fee Fiduciary requirements, and why the use of proprietary products by companies like Schwab and Blackrock - especially when combined with having investment discretion - may present a serious fiduciary problem when the rules take effect next April.
Which means ultimately, some robo-advisors may need to substantially change their business practices and how they operate in the coming months, to ensure they fit within the DoL's fiduciary rules. The most likely outcome may be for the companies to simply raise their fees, and eliminate their proprietary-product-based profitability, to ensure they're operating as Level Fee Fiduciaries. But doing so will throw a significant wrench in the growth of robo-advisors that were being cultivated specifically as a distribution channel for ETFs. On the plus side, though, it means the DoL's fiduciary rule may be more effective at limiting proprietary products than was initially believed!