Broker-dealers have been subject to a lot of fee pressure both from the market and regulatory changes. The new Security and Exchange Commission’s Regulation Best Interest (Reg BI) requirements have the entire industry abuzz and are another advisor requirement that must be met. Advisors and their firms have until June 30, 2020 to comply with the Reg BI rule, which requires them to put their clients’ interests ahead of their own, and to mitigate any potential conflicts of interest.

The administrative requirements and technology resources needed to address Reg BI are compelling, especially with a fast approaching deadline. One component requiring significant resources from firms is the delivery of Form CRS (Customer Relationship Summary), a summary of a retail investor’s overall firm’s relationship with their advisor or broker-dealer to all retail investors. But, firms can ensure they’re ready if they streamline workflow processes and consider new technologies. However, they will need to move quickly.

There is no denying that Form CRS is an important disclosure for retail investors, and is another step in providing clients with a better, more trusting experience with their wealth advisors. The SEC states that it will bring “transparency and comparability” to the process by which an investor chooses an advisor or broker-dealer. The form itself must not exceed two pages and be written in plain English, and will describe the firms’ fees, any possible conflicts of interest, and disclose whether the firm or its employees have any legal or disciplinary history. It can be delivered digitally or via paper and will outline the types of client relationship offered by the advisor or broker-dealer, and the required standard of conduct for those relationships.

In the spirit of education, Form CRS will also include a link to a dedicated page on the SEC’s website, which offers information about broker-dealers and investment advisors, and other materials. This will help allow the retail investor to clarify if they are dealing with an investment advisor or a broker-dealer, and what difference that might make to their experience.

While the objective of Form CRS may be relatively straightforward, compliance is not. The bulk mailing of forms to an advisor’s and broker dealer’s client base is the easy part. Firms must also send the same new disclosure to prospective customers, before they make any recommendations on account types or investments, let alone open an account for the investor. Firms also need to send a new Form CRS when there are changes to the disclosure, such as pricing structure changes, or whenever the relationship summary must be updated. There is another sting in the tail. Broker-dealers must track these communications, and store them for possible regulatory reviews.

Firms will need to beef up their technology to ensure compliance. Their systems need to be able to detect when a Form CRS is required to be delivered, create a list of recipients and automatically send out the disclosure document. The technology also needs to be accessible, allowing a broker-dealer who meets a prospect on the golf course or about town to easily send the document. Firms are exploring mobile solutions for their registered representatives.

The entire Reg BI process is ongoing. It’s not just the one-time delivery of Form CRS. It will require strategies and tactics well thought out with firms and their technology partners. The U.S.’s 2,700+ broker-dealer firms and 13,000+ investment advisors serve around 180 million customer accounts and clients. Firms also have about 130 business days to minimally deliver the Form CRS since both investment advisors and broker-dealers are required to start filing Form CRS from May 1, 2020, but no later than June 30, 2020. It’s also critical for firms to have an automated solution that provides Form CRS updates to prospects with product and pricing changes, etc. This process must be driven automatically by “triggers” from firms’ CRM and/or back-office systems. It will be necessary to track and prove the communications were sent since there will be the specter of SEC and FINRA audits over Reg BI.

Beyond Form CRS
Reg BI is not just a Form CRS story. Firms will have to show they have a reasonable basis for believing that their recommendations are in the client’s best interest under the rule’s new standard of care obligations. This will compel them to utilize comparison tools that allow them to easily weigh the pricing and share classes of their products against similar offerings. Firms will need to implement technology that provides this comparison, and quickly building it from scratch might not be an option.  

Firms will also face stringent requirements to identify, mitigate, eliminate and disclose material conflicts of interest. Again, they can manage compliance pains with software that offers deep insights into revenue sharing agreements and expenses, as well as a 360-degree view of client accounts and assets.

Resolve, rather than deep pockets, may be the most crucial asset when it comes to Reg BI compliance. The SEC concedes that the rule will impose costs associated with filing, delivering and recordkeeping, but is confident that the new requirements are achievable. For example, in the rule’s adopting release, the SEC said that while it recognizes the recordkeeping burdens relating to the delivery of Form CRS to prospective clients, “we disagree that they are insurmountable and would outweigh the benefits to retail investors.”

This is a reminder of the principle purpose of the regulation and supports the broader wealth management trend toward greater client personalization. Like Rule 30-e3, the SEC has said that the rule making was focused on protecting individual investors, and has not been about squeezing broker-dealers. In the long run, firms should actually benefit from the rule. Over 90% of clients with an existing financial professional relationship stated that they knew more about their relationship with the advisor after reading such disclosures, according to an SEC survey. But time is running out for firms to get their house in order.

Tim Slavin is senior vice president of retirement services at Broadridge.