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Turn Regulation Best Interest into a Value Proposition

Recasting regulatory obligations as cultural commitments

Historically, many firms have accepted a “C” grade when it comes to compliance; however, new regulations and increased regulatory scrutiny mandate raising the bar. The good news? Such efforts can translate into strengthening client relationships, growing assets and differentiating
broker-dealers and registered representatives as truly investor-centric.

The June 30, 2020, compliance date for the SEC’s new Regulation Best Interest (Reg BI) is rapidly approaching. Firms report varying levels of confidence as to whether they have in place what it will take to conform to the minimum standards about to take effect.

“Minimum standards” is emphasized to put in proper perspective what the rule represents in terms of broker-dealer and registered representative conduct. It’s important to understand that the SEC believes the new rules align “reasonable investor expectations” with “minimum conduct standards” for broker-dealers and registered reps. In SEC Chairman Clayton’s words, Reg BI is a package of rules and interpretations that “bring legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations.”1

Graphically, consider that the theoretical range of behavior of broker-dealers and registered reps could fall somewhere from non-compliant to exceptional. A “normal” distribution of firms providing recommendations and advice would look something like this with most practice standards falling under compliant:

Theoretical Distribution of Firms’ Practice Standards

Theoretical Distribution of Firms

The three takeaways from this graphic are:

  1. non-compliance is unacceptable and relatively rare:
  2. compliance is commonplace; and
  3. best practices are exceptional (and inherently compliant).

The opportunity for broker-dealers and registered reps is to focus on the right side of the graph by embracing best practices and positioning themselves as one of those elite, “exceptional” firms. This serves not only the best interests of the investor, but also creates a distinction of excellence in the marketplace for the firm.

It’s all about investor trust, but from two perspectives – regulators and investors.

Regulators set the bar low on trust. They strive to make sure the marketplace for advice is fundamentally trustworthy, yet not hampered by unnecessary regulatory burdens on financial service providers. To a certain extent, Reg BI raises the bar under the suitability standard governing the conduct of broker-dealers when providing “incidental advice” (i.e., transaction-related recommendations). While not a fiduciary standard, Reg BI’s introduction of fiduciary-like obligations for broker-dealers narrows the gap between the baseline standards for non-fiduciary and fiduciary advice.

Investors, on the other hand, set a higher bar. They are largely unaware of differences in baseline standards and have little interest in understanding how the regulatory system works. They look for someone out of the ordinary – the most credible, reliable and client-focused (i.e., most trustworthy) candidate they can find.

Compare the four obligations of Reg BI with comparable attributes that investors value:

Reg bi blaineaiken_fig2

Most firms have work to do to achieve compliance with Reg BI’s four new obligations and disclosure requirements by June 30th, but there’s a big gap between being compliant and being competitive. Firms should translate best interest obligations to the positive attributes that clients seek and adopt practices that showcase how they excel in these areas.

Fiduciary principles and practices create the framework for trust. A cultural commitment by a firm and its broker-dealers and registered reps to professional excellence transcends mere compliance to build a distinctive value proposition.

Going Beyond Regulation Best Interest

With the recent acquisition of Fi360, Broadridge has added capabilities to not only address the obligations of Reg BI, but also to promote a culture of commitment to professional excellence by embracing fiduciary principles, even when regulatory accountability as a fiduciary may not be required.

Here’s how Broadridge can help firms comply with Reg BI and strengthen their competitive position:

Broadridge Offering Reg BI Application
  • Reg BI Essentials
  • Accredited Investment Fiduciary (AIF®) Designation

Reg BI Essentials is a two-part training solution for home-office personnel and broker-dealers and registered reps in the field. Attendees learn to understand, apply and reliably comply with the entire Reg BI regulatory package.

The AIF® Designation is an ANSI-accredited professional designation* based upon Fi360’s comprehensive Prudent Investment Practices Handbook series. It provides in-depth coverage of all four Reg BI obligations and much more. The Prudent Investment Practices cover all client types, not just retail investors. AIF® Designation training and continuing education keep designees at the forefront of regulatory developments and best practices.

  • Fiduciary Focus ToolkitTM
  • Fi360 Fiduciary Score®
  • Business Intelligence
  • IRA Rollover Analysis

FFTK equips users with the ability to reliably apply Prudent Investment Practices that are consistent with Reg BI’s care and compliance obligations. FFTK has built-in capabilities to serve fiduciary and non-fiduciary advisors.

The Fi360 Fiduciary Score® provides a clear, consistent, objective due diligence process that is a great solution for Reg BI’s care obligation.

Fi360’s Business Intelligence capability provides home-office personnel great visibility into broker-dealers and registered reps activities regardless of the investment management software the broker-dealers and registered reps use; this is ideal to serving Reg BI’s compliance obligation.

Fi360 will soon release an application that applies and documents a prudent process to evaluate plan distribution/rollover options, consistent with Reg BI’s four obligations.

Support and Verification
  • Thought Leadership
  • Assessments and Certification from the Centre for Fiduciary Excellence (CEFEX)

Fi360’s subject-matter experts are available to support the thought leadership initiatives of clients, including those related to understanding, complying with and building upon Reg BI as a value proposition.

CEFEX provides organizations the ability to be evaluated for conformity to established standards of care (e.g., Fi360’s Prudent Investment Practices Handbooks) and fosters continual improvement. Organizations that fully comply with standards can become CEFEX Certified, be recognized in a public database, and are authorized to use the CEFEX seal – a unique mark of distinction, signifying that the organization is worthy of trust and confidence.

Fi360’s mission is to help clients profitably gather, grow and protect investor assets through better investment and business decision making. Clients of Fi360 include investment advisors and financial service providers to fiduciary and non-fiduciary advisors.

Anticipate a future of regulatory uncertainty by embracing high professional standards

Reg BI is nearly upon us; a new version of a DOL fiduciary rule is expected later this year; and states are introducing their own fiduciary rules. Change is the only regulatory certainty.

While you’re tackling the operational changes on your Reg BI to-do list, seize every opportunity to up your fiduciary game in the process. Here’s why: The implementation of Reg BI represents another giant step on the road to providing clients with a better, more trusting experience with their wealth advisors. Those firms that deliver a seamless Reg BI experience – and visibly put investor best interests first – will advance competitively in the eyes of their current clients and future prospects.

  1. July 8, 2019, investor presentation by SEC Chairman Jay Clayton.

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