A provider of technology solutions for registered advisors and independent brokers is seeing more financial firms inquire about developing in-house robo solutions to address the needs of low-account balance IRA accounts.

In a call with analysts, Judson Bergman, CEO of technology-based portfolio and practice management provider Envestnet, said the finalization of the Department of Labor’s fiduciary rule has led to mounting interest from clients and prospects “looking to digitize a solution which would comply with the new rules” that will allow them to continue to service lower IRA account balances in a “profitable way.”

The rule’s Best Interest Contract Exemption is expected to encourage advisors to IRAs that are compensated on commission-based sales of investments to move to a fee-based model of compensation.

Doing so will facilitate advisors’ and brokers’ compliance with the BIC exemption, which requires all investment recommendations be made solely in clients’ best interest.

Critics of the DOL rule have long argued the rule’s strong preference for the level-fee compensation models already common in RIA practices will make servicing accounts with low balances too expensive.

That in turn will encourage advice providers to move account owners with smaller balances to a robo-advisor, or automated platform, to make those accounts profitable.

Bergman’s assessment to analysts during the company’s recent earnings call seems to support that prediction.

“There is an acceleration for exploring more of a digital offering for a segment of their clients,” said Bergman. “This is not going to be a huge grower for any of them, but we expect that there will be, in some cases, thousands—and with larger firms maybe even tens of thousands—of commission-based IRA accounts that are too small for a fee-based advisor to get interested in.”

In a recent report, Goldman Sachs said $5 trillion of the $7.3 trillion in IRAs will not be affected by DOL’s rule, as those assets are already in fiduciary-managed accounts or self-directed by investors who do not use advisory services.

In 2013, the average IRA balance was nearly $95,363, according to the most recent data from the Employee Benefits Research Institute. The median balance was $25,438.

But EBRI’s data shows the average IRA balance is much higher when contributions were from a rollover from an employer-provided retirement plan. That average balance was $142,587 in 2013.

The DOL rule is expected to affect 401(k) rollovers to IRAs, as many are predicting more assets will remain in 401(k) plans. Any advice to roll over assets will be considered fiduciary in nature, meaning even RIAs operating on fee-based compensation models will be required to prove why recommending the rollover is in a client’s best interest.

Instant Insights /

Increasing interest in automated solutions for low-balance IRAs

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