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Reg BI Requires Brokers and Advisors to be “Very Candid with How They Make Their Money”

Jul 5, 2019 7:37:00 AM

Shortly after the passing of Reg BI by vote in the SEC on June 5, 2019, SEC Chairman Jay Clayton was interviewed by CNBC’s “Squawk Box”. In this interview, he clarified a few key differences between fiduciary duties and best interest standards.

Whether you’re talking about fiduciary duties or best interest standards, the same spirit herein lies – advisors and brokers should never under any circumstances be putting their own self-interests ahead of the best interests of the consumer. Product recommendations and investment advice should be given for the sole purpose of continuing to meet the clients’ needs in a meaningful way and should NOT be based on the commission or other personal incentives the advisors and brokers may have to offer such advice.

What differentiates fiduciary duties and best interest standards is the way the financial professionals involved get paid. For broker-dealers, the nature of their relationships with their clients are typically much more transactional since they make commissions based on individual products or policies. Meanwhile, investment advisors are held to a higher duty of care for their clients due to the more long-term nature of their client relationships. Those two types of relationships are drastically different, which is why it’s so important to clearly define the obligations broker-dealers have versus the obligations investment advisors have. Fiduciary standards are some of the highest imposed by law and are very distinctly articulated for those in the investment advisor space. Reg BI is the SEC’s attempt to federally regulate best interest standards for broker-dealers in a much more explicit way than before.

For SEC Chairman Clayton, it all boils down to this: “We’re raising the standard of conduct for broker-dealers – the obligations they owe their clients. Whether you’re an investment advisor or a broker-dealer, you’re going to have to be very candid with how you’re making your money.”

Now that Reg BI has formally passed, it’s critical for organizations to establish processes and procedures that guarantee their compliance with these new regulations. The Proformex inforce policy platform supports these efforts by compiling powerful data and analytics that can be used when making product recommendations to clients, and the automated annual reviews ensure all policies and products perform as expected. To learn more about how Proformex helps with best interest standard compliance, please visit our website.

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