Understanding and complying with regulations is an important matter for financial advisors that can’t be discounted. One recent development in this area is the Regulation Best Interest (Reg BI). As mandated by the SEC in 1934, Reg BI means broker-dealers and registered representatives are to act in the best interest of their clients in an advisory setting. Here’s what you need to know about this “best standard” of conduct.
Accountability-First
When working with new clients, financial advisors must file and provide them with a Form CRS. This document discloses relevant information about the firm in simple terms. For instance, it might detail the investment services provided, fees, conflicts of interest, and the legal and disciplinary record of the firms and its members.
More recently, the Form CRS requirement of Reg BI took effect on June 30, 2020. The intent is to enhance transparency while addressing and eliminating conflicts of interest. In short, it challenges financial professionals to elevate accountability.
The regulation is predicated on broker-dealers delivering on four core obligations when working with clients.
1. Disclosure Obligation
Advisors must disclose all material facts around a recommendation. For instance, they must be forthcoming when discussing fees, costs, and potential conflicts of interest.
2. Care Obligation
Per Reg BI, financial advisors are to exercise diligence, care, and skill when making recommendations. The client’s financial needs, investment goals, and life’s circumstances must be taken into account. All of this to say: Your recommendations must jive with their best interests, not necessarily what might benefit your firm.
3. Conflict of Interest Obligation
Firms are obligated to establish, monitor, and enforce policies and procedures to identify, disclose, and mitigate conflicts of interest. Conflict management needs to extend beyond basic disclosure. Advisors must actively work to limit conflicts.
4. Compliance Obligation
To meet Reg BI’s standards, advisors must develop and enforce written policies and procedures that align with the framework. However, this is not a static goal. Advisors need to revisit their operational practices to ensure ongoing adherence.
Why It Matters
Practically speaking, Reg BI moves the industry towards more client-centric practices. You might feel like this extra due diligence means additional work and frustration. However, it’s a worthy endeavor. Exercising a greater degree of care is how the industry as a whole builds consumer trust, cultivates long-term relationships, and lays the foundation for a sustainable business model. Here are three intangible benefits:
1. A High-Trust Environment
Putting your client’s best interest first increases credibility and trust. Investors are more likely to stay with advisors who have demonstrated transparency, due diligence, integrity, and other admirable traits. They’re more likely to recommend you to friends and family when they feel they’re in good hands.
2. Competitive Advantage
Advisors who’ve adopted and integrated Reg BI on the job can differentiate themselves. Leading with a “best interest” approach communicates a commitment to exceptional client service.
3. Ethical Alignment
Reg BI advances the industry by spelling out specific compliance standards and ethical practices.
A Guide to the Basics
To comply with Reg BI, advisors should take proactive steps to integrate this regulatory framework into their workflows.
Build Stronger Client Records
Make sure you document every recommendation, including the rationale behind it and how it aligns with your client’s interests. Doing so signals transparency and ensures you can prove you’ve met disclosure and care obligations. Even if a client decides not to follow your recommendation, it’s essential to have it time-stamped and documented for record-keeping.
Standardize Due Diligence Processes
Develop practices to standardize due diligence for every client interaction. This might include generating financial profiles, understanding risk tolerances, and comparing investment options more holistically.
Use Technology for Compliance
Technology can work to your advantage in simplifying compliance. Platforms like Docupace can create shortcuts that eliminate administrative labor associated with new account opening, surveillance, and compensation.
Staying compliant with Reg BI (and other practices) doesn’t have to be a chore. Docupace empowers firms to stay on top of regulatory red tape through seamless digital workflows. From bi-directional data integration to sharing forms across a document ecosystem, our solutions help you build and sustain a practice that’s not only compliant but also efficient. Schedule a discovery call and learn more about Docupace’s integrated compliance solutions today.
