For Wealth Managers, The SEC’s New

Regulation “BI” Puts Awkward Fine

Print Up Front

Jason BisnoffForbes Staff

Money

“Accentuate the positive” has long been a mantra among salespeople. However
now that Regulation ‘Best Interest’ or BI has finally arrived, doing so may
present challenges for some.  The new rule enacted on June 30th comes after a
series of court battles, vacated rules, and the work of several prudential
regulators to set a higher standard of conduct for brokers.

The rule basically stipulates that brokers need to make recommendations in

the best interest of retail clients. It is stronger than the suitability standard set
by the Financial Industry Regulatory Authority which says that
recommendations only need to be appropriate based on a clients needs and
circumstances, but weaker than the Department of Labor’s fiduciary standard
which would have called for changes to the compensation structures of
brokers and some advisors.
The Securities and Exchange Commission put forth the rule after the vacation
of the Department of ... [+]
 FORBES

The idea of a fiduciary standard for brokers was first put forward in the Dodd-
Frank Act in 2010 and then taken up by the DOL in 2016. After a lawsuit by
the US Chamber of Commerce and the Securities Industry and Financial
Markets Association, the rule was delayed by President Trump and eventually
vacated by the Fifth Circuit Court of Appeals in June of 2018. With that, the
SEC took up the initiative to pass a rule with similar intent.

Recommended For You

Under the new rule, financial advisors will face heightened suitability
standards, more disclosure requirements, greater requirements to mitigate
and disclose conflicts of interest, and a need to put procedures in place for
compliance in all brokerage accounts.

Among those disclosures is the Form CRS, which both brokers and advisors
must provide to customers containing information about their products,
services and relationships. It discloses services provided, core conflicts,
disciplinary history and fees charged.
PROMOTED

Civic Nation BRANDVOICE | Paid Program

Basketball Coaches Team Up To Grow Athlete Voting
Grads of Life BRANDVOICE | Paid Program
Teleworking As An Intern During The Pandemic
UNICEF USA BRANDVOICE | Paid Program
Why Kids Of All Races Need To Know How To Talk About Race

While firms are taking different approaches to some of the planning around
the rule, certain provisions are prescriptive and applicable across the industry,
such as the Form CRS disclosure document, according to UBS head of
advisory and planning products Steven Mattus who has been leading the
deployment of Reg BI for the Swiss financial services giant.
UBS
 AFP VIA GETTY IMAGES

The rule and that disclosure requirement will most impact advisors when they
approach prospective clients, according to Mattus, who says it requires some
“awkward” disclosures during early conversations with advisors unable to
answer questions with recommendations without first sending over disclosure
documents and other, longer forms.

“It changes that interaction that the financial advisors have with current
prospects,” he adds. However, for top advisors at the firm, he said “this is not
a fundamental change to anyone's business model as far as we can tell.”

Eric Hauser, the managing director of the investment products group at Wells
Fargo Advisors WFC -1.3% concurs with Mattus. Delivering disclosure
documents that might indicate fee disclosures or disciplinary history among
other things prior to the earliest occurrence of either recommending or
opening an account, or even recommending a security, will present challenges.
This is something that is tough to do in many of the arenas where advisors do
business, such as on the golf course, and will require developing a new muscle.

Looking on the bright side, St. Louis-based financial advisor and market
manager for Wells Fargo Tim Kertz says that delivering that Form CRS and
working with goals-based planning gives the advisor an opportunity to further
accentuate their value proposition prior to investing on behalf of clients.
Wells Fargo
 VICTOR J. BLUE/BLOOMBERG

Hauser said that the changes the firm implemented originally for the 2017
DOL rule were helpful in preparation for Reg BI as the firm had kept many of
them in place.
The San Francisco-headquartered wirehouse had conference calls and training
sessions leading up to the compliance date including a “let’s go” call on June
30 with top advisors sharing best practices.

“For those with disciplined processes and goals-based planning, this was not a
major bump in the road, it actually accentuates the way they run their practice
because they are doing it the right way,” Kertz says.

Kertz adds that this rule creates more awareness for advisors on the
categorization of their brokerage versus investment advisory relationships. In
practical terms, this will lead advisors to do more documentation and
“homework” before making a recommendation, something many of them were
already doing and a welcomed task according to Kertz if it removes some of
the “snake oil salesmen” from the industry.

The firm is coaching advisors to document as much as they can with the
uncertainty of how the SEC or FINRA will examine and enforce compliance.

Form CRS, which advisors must provide to all existing and prospective clients,
post on their website, and deliver to the SEC, is also