$760K reasons to comply with Reg BI


$760K reasons to follow Reg BI include not burning through money on SEC/FINRA actions.

Two years ago, Reg BI went into effect, with all the usual fanfare from the advisory community that accompanies new regulations. Regulation Best Interest (BI), an SEC rule, mandates that advisors must act in the best interests of their clients by informing and educating them about investment decisions. The rule also imposes requirements on Broker-Dealers to mitigate supervisory and potential conflict of interest issues, among others, that may arise.

A recent WealthManagement.com article illustrated the cost of compliance, or lack thereof, from not following Reg BI. HighPoint Advisor Group in Illinois, an OSJ with LPL, was fined more than $760K for conflict of interest issues regarding transaction fees. While the fines and the SEC action relate to incidents prior to Reg BI’s launch, it does highlight a key part of Reg BI: firms must implement a system for mitigating conflict of interest issues as they arise.

Prior to Reg BI, advisors followed the suitability standardwhich allowed them to simply recommend suitable investments versus acting in the best interests of their clients first. The key difference between the two standards is that advisors are now mandated to put the client’s needs before their own, provide full disclosure, avoid conflicts of interest, and maintain an obligation to compliance. Broker-Dealer firms are similarly compelled to follow Reg BI from a supervisory and compliance oversight perspective.

Under Reg BI, the firm would still bear responsibility and it’s possible (likely) that penalties and fines would be even more significant. The real point: the cost of compliance is far less than the potential penalties, fines, and reputational risk that comes from not following Reg BI.

Reg BI principles (including the bolded where HighPoint Advisor Group may have faced similar or greater fines under Reg BI) include:

  • Prove/document that you have the client’s best interests first, always
  • Understand the risks, rewards, and costs of your recommendations
  • Show that recommendations are in a client’s best interests based on their investment profile
  • Implement a system to mitigate conflicts of interest that may arise
  • Show that the cheapest option isn’t necessarily in the client’s best interests

An uptick in SEC compliance crackdowns and Reg BI charges against firms for avoiding transaction fees, recommending higher cost funds, or selling riskier bonds (for example), illustrates that it is more important than ever that advisors show clients that they act in the client’s best interests, first.

With an obligation to compliance being one of the main components of Reg BI, LOGICLY provides advanced technology and industry leading research capabilities which allows advisors to streamline portfolio research and understand the risks and costs involved through various comparison and analysis tools. 

How Broker-Dealers and advisors can get on the same page with clients and safeguard investment decisions and strategies:

Know what you own

Increasingly complex products alongside the growing uncertainty of the financial markets means that advisors must do more to know their clients, the “KYC” rules that run parallel to Reg BI.

By offering greater transparency into ETFs and mutual funds and their constituents, performance drivers, and rebalancing methodologies, advisors show clients that they’re acting in their best interests. This also encourages client participation in, and understanding of, the investment decision-making process.

The more clients understand, the more connected they are, and the better the advisor-client relationship. Better relationships lead to fewer unhappy clients, even if markets are turbulent.

Pay the right price

Costs and fees are an area of intense focus for regulators. Reg BI specifically calls out cost and makes a key point, as noted above: that the cheapest option isn’t always in the client’s best interests.

The case with HighPoint underscores this point. Avoiding transaction fees, while moving clients into NTF funds, drew the scrutiny of regulators. Understanding the total cost of ownership is more important than just knowing initial investment fees, as other fees (like 12B-1 fees) can erode a client’s investment faster than transaction fees.

Guiding clients in paying the right price also mitigates an all-too-frequent client pitfall: “cocktail party bias”, where clients invest in complex products for no other reason than to appear smart to friends and family. And typically pay more to do so.

Use a system to mitigate conflicts of interest

Conflicts of interest may arise if the firm and the advisor who is serving clients do not share the same standards. Under Reg BI, firms and advisors have a clear mandate: serve the client’s needs first and not put the firm or advisor’s needs ahead of the client’s best interests.

It seems simple, however aligning clients with appropriate and suitable products (those that fit with the client’s Investment Policy Statement, IPS) can be a complex endeavor as noted in the HighPoint matter. Technology gives advisors and BDs the ability to get on the same page with clients, document investment conversations and decisions, and provide the transparency clients (and regulators, for that matter) demand.

We hear from advisors and BD firms that they use LOGICLY to bring clarity to conversations with clients in knowing what they own, paying the right price, and why investment decisions are made and how they align with the IPS.

Build trust through transparency 

When it comes to advisor-client relationships, trust and fairness are critical success factors. Clients seek advisors and firms that they can depend on during difficult times, like periods of uncertainty and whipsawing volatility brought on by the COVID-19 pandemic, inflation, and increasing chances of a recession.

For advisors asking, “How can I get my clients to trust me?” The key to earning trust is being transparent. For firms, operating with transparency and including it as a driving force of its policies and standards is table stakes in earning a client’s trust.

Gain trust, earn respect 

Clients expect advisors to explain investment strategies and decisions while also providing open and honest feedback when managing their portfolios. It’s no secret that when advisors take the time to discuss the reasoning behind their recommendations, it puts the client at the center of the conversation and promotes a better understanding of the investment processes.

Do the research

Clients take two educated risks when choosing an advisor. Aside from choosing one advisor over another, clients also bet on the advisor’s acumen and ability to guide the client toward their life goals and desired outcomes.

Using tools that facilitate due diligence provide advisors with ample opportunities to research and compare different ETFs and funds for clients, while giving compliance officers oversight in investment decisions that sync with the client’s IPS.

Meet Reg BI requirements with LOGICLY’s tools for advisors and BDs including:

Fund Screener

  • Filter global universe of ETFs and funds against any criteria to meet any client objective
  • Customize views for key investment parameters like risk, expense ratios, trailing flows information, and ESG, among others

Security Overview

  • Quick and easy tool for firms to remain compliant with Reg BI
  • Evaluate investment products to find appropriate and suitable recommendations for clients
  • Compare costs with peer funds, while also choosing relevant benchmarks
  • Identify similar fund choices to compare one fund versus other like funds
  • View advanced breakdown of a given portfolio’s cost

Compliance officers get point-and-click access to an innovative solution to stay on top of what the firm’s advisors are doing. Firm-wide capabilities provide vital compliance information. View client-related documents that advisors generate and a history of portfolio changes saved by an advisor.

In the below video, Andrew Unthank demonstrates how to answer the cost and reasonableness components of Reg BI. Watch as Andrew shows how easy it is to find similarity data points between funds and ETFs. And show your clients that sometimes, the cheapest option isn’t the best or most suitable option.

Connect with us today to see how you can Overcome Reg BI challenges with LOGICLY!

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