I’ve written previously about how robo technology can provide scale and efficiency for plan consultants and their plan-sponsor clients. But is there a risk that those gains result in less effective fiduciary compliance or can automation simultaneously improve compliance?
Robos’ Strengths and Weaknesses
Blaine Aikin is executive chairman of Pittsburgh-based Fi360, which develops fiduciary standards and provides accreditation, consulting and education for financial intermediaries. He believes that robos cover some aspects of fiduciary responsibility particularly well, but acknowledges that compliance in other areas requires human intervention.
An advisor working with retirement plans needs to zero in on the two main fiduciary duties of loyalty and care, says Aikin. Loyalty deals largely with avoiding or mitigating conflicts of interest, and he believes robos tend to be very good at managing this duty. “They primarily do that whenever they use open architecture, for example,” he says. “You have a wide array of investment vehicles and specific selections within those vehicles that you can then perform due diligence on. The wider the open architecture, the greater the opportunity to avoid conflicts of interest as opposed to having limitations.”
Fulfilling the duty of care becomes more of a challenge as individualization and complexity increase, Aikin notes. Fiduciaries must act with prudence and exercise the “diligence and good judgment of a competent professional” in all instances, but participants and plans have different requirements that affect automation’s potential role. “I would say, overall, the more individualized and complex the situation, the more human intervention is likely to be,” he says. “You can have retirement advice being given at the plan level, where things are more aggregated and there are criteria set for how that plan is going to work. There I would say you are typically able to manage using automation more.”
There is extensive variation among participants’ goals and finances, however, which can limit automation’s application and benefits. “You can have real ranges in terms of degree of complexity of the participant’s situation that extend beyond what you see if you’re just looking at the plan assets,” says Aikin.
Developing the Tools
Greg Kasten, founder of Unified Trust Co. in Lexington, Ky., is concerned that the fiduciary aspects of providing digital advice at the participant level aren’t getting enough attention. Kasten, whose firm has developed a robo service that he reports provides real-time fiduciary controls, maintains that fiduciary status requires more than just an annual portfolio compliance review. Instead, the data requires constant resampling and testing for outliers and inconsistencies. “Who is doing real-time fiduciary compliance for these best practices for all these participant accounts day after day after day?” he asks.
Kasten shares the experience of a Unified Trust staff member who has invested about $15,000 with a well-known robo service that claims to offer tax management for its portfolios. According to Kasten, the service incorrectly lists the employee’s portfolio’s cost basis as $35,000, which means her account has about $20,000 of unrealized capital losses, an error she is working to get corrected. “If they’re doing tax management and they’re looking at all these supposed things for her, their data are completely wrong,” he adds. “My point is to not beat up on any particular program. My point is that if you do not have real-time fiduciary compliance and you’re (not) testing these accounts on almost a daily basis, you’re going to spit out so much gibberish that the analysis becomes useless.”
Kasten also cites the need to keep a participant’s portfolio aligned with his or her investment policy statement (IPS). Consider an advisor working with five plans that have a combined total of 500 participants: How can the advisor know that a specific participant’s portfolio is following the IPS? The digital advice programs say they’re rebalancing portfolios, says Kasten, but who is real-time testing to determine that a portfolio complies with the IPS’ asset allocation parameters?
Given the difficulty of monitoring multiple participant portfolios for multiple point compliance in real time, automation is essential, Kasten maintains, and Unified Trust has been developing a proprietary fiduciary certification review based on Fi360’s best practices. Failing to address this issue is an oversight that he believes will become a problem. “Digital advice in the absence of fiduciary compliance on a real-time basis, I think, is going to get a lot of plans and advisors into trouble down the road,” he cautions. “We’ve already looked ahead and said you can’t just give advice, you can’t just be a robo — it’s a holistic financial planning solution, but you also need real time fiduciary digital compliance, as well.”