Broker-dealers are beginning to drill down and decide which products, practices and customers have to be eliminated from their platforms because of conflicts and costs under fast-approaching retail investor conduct regulations.
The driving force behind the decision-making is the U.S. Securities and Exchange Commission’s Regulation BI, the new broad-based retail investor conduct rules that will seemingly impact every aspect of the industry’s business when it goes into effect June 30, said industry executives at the Financial Services Institute Forum in Washington, D.C., today.
While there is no denying that the grey areas created by voluminous regulation are great, perhaps the greatest divide is between what dually registered advisors believe they will need to do to get ready for the rule and what broker-dealer executives themselves believe.
One successful Midwestern dually registered advisor who does most of his business on a fee-basis told Financial Advisor magazine at the conference that he believes he will need to shed brokerage clients who don’t want to convert to a fee-based account—even those who have worked with him for years—because Reg BI will force him as a "fiduciary to do so.”
He also said many other hybrid advisors are already shedding clients that either won’t transition to a fee-based advisory account or who are not profitable enough to work with on an asset-based fee basis. Even his own clients are getting orphaned or fired by other brokers with whom they don’t have more than $100,000, he said.
In contrast, an attorney from his broker-dealer who sat at the table with him at the Mayflower Hotel said he will not have to shed his pure brokerage clients. “But the regulation will need to be much clearer than it is now,” he said. Both asked not to be named in this story.
To avoid this kind of misunderstanding, education will be critical, said Kevin Miller, executive vice president, general counsel and chief compliance officer at Securities America Inc. Miller was part of the Reg BI implementation session at the FSI conference.
“Most [dually registered] advisors say, ‘We are acting in the best interest of clients,' but they aren’t segmenting themselves this way,” which will be necessary under Reg BI for each account, procedure and disclosure, Miller said.
“That is one of the challenges of Reg BI for dually registered advisors,” agreed Elizabeth Hansen, senior vice president of Waddell & Reed. “They don’t think in terms of that. They look at how they work with their clients. In their minds it is clear they’re an advisor. I think this will be a challenge for them. But with financial planning, how do you bifurcate if there are recommendations coming out of the financial plan that are implemented on the brokerage side?” .
To decide how to handle the hand-off between brokerage and advisory accounts and what products will be kept or cut from firms’ investment platforms, executives at the forum said they have created task forces and are using committees on investments, conflicts and disclosure—many previously formed to help them comply with the now-defunct Department of Labor fiduciary fiduciary rule.