Since the SEC implemented its Regulation Best Interest rule in June 2020, brokers and wealth advisors have navigated how to apply it in their firms. Despite some murkiness and gaps in the rule, many organizations have done their best to give a good-faith effort to bring its underlying principles to their clients.
The challenge of establishing and maintaining Reg BI compliance presents many wealth management firms with a daunting operational task. Some Reg BI compliance guidelines require significant time, effort, and resources to implement across an organization. While this adjustment is challenging, it is possible. Firms that meet Reg BI compliance head-on will find success by making adjustments in their business model and using innovative technology to streamline their processes.
Operationalize the Form CRS
A lot of concern and confusion regarding Reg BI compliance comes from the Form CRS. This relationship summary disclosure gives retail investors information about the nature of their relationship with their advisor. Firms must provide certain information in Form CRS that can be time-consuming to obtain and cumbersome to compile. In a recent survey by Deloitte, 79% of financial advisors felt that implementing Form CRS was the most difficult part of operationalizing Reg BI compliance. This was particularly true for 56% of large firms and 61% of small firms, respectively.
While many firms struggle to implement and deliver Form CRS to their retail customers, growth-minded firms have met this challenge and become experts in Form CRS by:
- Reading, understanding, and internalizing the guidelines and advice given by the SEC
- Following a clear checklist of what needs to be included in Form CRS
- Streamlining the process by looking into digital options for completion and delivery
- Establishing a culture of increased transparency between advisors and retail customers
Form CRS is viewed as the biggest stumbling block for wealth management firms but only requires a shift in thinking and policy to become a strength and a differentiator.
Invest Well in Compliance Tools
Wealth management firms have an opportunity to evaluate their business models and prioritize compliance. Regardless of changing administrations and regulations, investing in compliance tools makes changes far less disruptive.
Deloitte’s 2020 survey found that much of the cost for implementing tools, processes, and infrastructure for Reg BI compliance is incurred up-front, which can cause a major upheaval in daily operations. 20 of the survey participants reported they allocated approximately $114 million combined for readiness efforts related to Reg BI compliance. $61 million of this investment (54%) was spent on technology and tools needed to support dealer-brokers and advisors to prepare and provide the required disclosures. These major investments and adjustments are why panelists in a 2019 webcast for InvestmentNews said that firms could not procrastinate complying with Reg BI.
To counteract the up-front investment in Reg BI compliance, firms have adjusted to restore balance and acclimate their teams. Deloitte’s survey found that 69% of participants planned to make shifts in business strategy, including:
- Compensation strategy — how commissions, incentives, fees, etc. are scheduled
- Technology strategy — investment in software, programs, and other tools that enable and maintain compliance
- Talent strategy — staffing, educating, and enabling people to be successful in the new normal of Reg BI
Wealth management firms should also consider the maintenance costs now associated with Reg BI compliance, which was estimated to be around $2.9 million per firm. Investing in the right tool for automating and streamlining Reg BI compliance can save a lot of time and money.
Consider a Digital Strategy for Reg BI Compliance
Innovative firms have found that the right tools and technology simplifies the process for Reg BI compliance. For example, choosing a paperless, cloud-based compliance management system provides significant benefit to firms:
- Centralized compliance operations in an integrated space
- Secure storage and data center security with guaranteed disaster recovery
- Increased speed and ability to access, sign, and share documents
- Built-in compliance management, including timestamped delivery, automated mailing, and audit-friendly reporting
Reg BI compliance is a new standard that requires significant time and investment to get right. While some firms have been slow to adapt and re-think the way they do business, many have allowed this new process to unlock the potential that technology and innovation bring to streamline processes, empower their advisors, and set themselves and their clients for short and long-term success.
David Knoch is CEO of Docupace a solutions provider focused on digitizing and automating operations in the financial advice and investment industry. David currently serves as the Immediate Past Chair of the Financial Services Institute (FSI) Board of Directors and has been voted one of the 25 most influential people in the Investment Advisory industry two years in a row – 2018 and 2019.
