The U.S. Department of Labor’s fiduciary standard is at least a step in the right direction, said panelists at the 2016 Morningstar Investment Conference in Chicago, but it might come with unintended consequences.

Speaking on Monday, Don Phillips, Morningstar’s managing director, said the threat of lawsuits could have a chilling effect  on advisors’ investment decisions.

“I worry that this makes the industry play defense more than offense,” Phillips said. “The safe (investment) choice is the low-cost index fund, and portfolios start to look simpler, which is good because you’ll eliminate egregious behavior, but you make money in investing by not following the crowd. You have to stick your neck out.”

Phillips said the additional liability would cause some advisors to leave the industry entirely.

“Why aren’t advisors treated seriously like doctors, accountants or lawyers? It’s the consequences,” said Phillips. “Look at physicians and surgeons, many people are exiting the business because so many lawyers are out there looking for someone to blame… there will be advisors who retire early because they don’t want to put up with the wall of litigation.”

Bill Berstein, co-founder of Efficient Frontier Advisors, said that reigning in advisor’s investment methods could have positive consequences, as more assets would end up in low-cost index funds.

“If everybody owns the market at a cost of 5 basis points per year, 95 percent of investors would be better off than they are today,” Bernstein said.

Panelist Blair DuQuesnay principal and CIO of 30 North Investments, said the rule fails to clarify the confusing “alphabet soup” of titles and credentials within the financial industry. “It’s almost impossible for a layperson to distinguish between advice and sales. It would be nice to see the industry unite and create a credential.”

In April, the DOL released the rule’s final language, which binds any advice provided to retirement plan participants and IRA holders to a best-interest standard.

In the end, it falls short of protecting the average consumer, argued DuQuesnay.

“We’re only halfway there,” she said. “I don’t think it goes far enough. The DOL has forced the SEC’s hand, and they’ll have to act.”

Missing The Point

A tumultuous ongoing debate between proponents of active management and adherents of passive indexing is damaging Americans’ ability to save and invest, said Phillips

“The line has been drawn between index and active, one has been sainted, one has been vilified,” Phillips said. “The movement towards indexing isn’t coming out of the crummy super-expensive active funds, it’s coming out of good funds from companies like Franklin Templeton and American. It’s not that passive is bad, I just think it’s overdone."

The often negative tones of the debate, where each side is accused of passing on excessive fees to investors, providing little value to justify a fund’s expenses, or of exposing investors to an undue amount of market risk, scares middle class investors away from investing, Phillips said.

The active-versus-passive argument misses the point, said Phillips, since the main driver of investment returns is actually cost: A low-cost active fund is likely a better option for investors than an overpriced index fund.

“The main benefits of passive are the low cost and the low turnover,” said DuQuesnay. “Now we’re blurring the line between what is really passive and active with rules-based investing, which is a new version of low-cost active.”

Bernstein said as that rules-based indexing strategies like smart beta catch on, they might become a victim of their own success.

“The real danger happens when the smart beta is overwhelmed by the dumb money,” Bernstein said. “You’re going to see a lot of people piling into these funds, and then piling back out of them when those risk factors turn negative.”

A Silicon Silver Lining

On the bright side, the advent of robo-advisors and other automated systems and processes enables advisors to serve a broader range of clients and could push the middle class into investing more of their assets for retirement.

Phillips said while the industry once thought automated advice might replace traditional advice, many wealth managers now believe it will complement their service models.

“We should be supporting anything that gets people to a better endpoint, but instead we’re spending a lot of time in turf wars,” Phillips said. “We should let the investors choose which channel they’re going into.”

Bernstien noted that digital tools that provide clients with a basic level of advice and investment options for low costs brings smaller investors into the industry. For an even larger range of investors, target-date funds approximate the functions of a robo-advisor at an even lower cost from discount brokerages.

“We’re broadening the lens,” Bernstien said. “It’s absurd to expect the people who are flipping our burgers, taking care of our kids and teaching our kids to be able to invest in individual stocks and bonds. This is as hard as flying a jetliner or being a brain surgeon.”

DuQuesnay said that younger, lower-asset investors benefit from streamlined account-opening processes and automated contributions.

“With younger clients it’s been tough, they’ve graduated college into one of the last two recessions, they’ve had to work jobs out of their field, there’s a lot of struggles, and we’re switching from a traditional employment economy to a gig economy,” which means they’ve had to set up their savings and investing plans themselves, DuQuesnay said. “We should just be focusing on setting up automatic savings plans as much as possible — setting up the automated-savings process is more important than selecting the investments themselves.”