The Regulation Best Interest standard, which spells out specific compliance guardrails for advisors making recommendations to retail clients, can’t be treated as a “check the box” exercise, Securities and Exchange Commission Chairman Gary Gensler warned at the Financial Industry Regulatory Authority’s annual conference Tuesday. 

Gensler said that advisors who want to ensure their recommendations are in clients’ best interests need to go beyond merely making sure recommendations are “suitable” and analyze all costs and relevant alternative investments.

Gensler’s warning comes a month after the SEC published a staff bulletin on Reg BI’s obligation of care, which spells out that both firms and advisors must develop an in-depth understanding of their clients and the potential risks, rewards and costs of each investment or investment strategy they recommend.

Regulators at the Washington, DC conference also zeroed in on complex products.

“When we’re doing a risk-based exam, you can bet complex products are on the top of our radar as something we’re going to look further into,” Nicole McCafferty, Finra vice president, Examinations, said. 

“I think as a baseline you should make sure your firm has a reasonable basis that this product is in the best interest of at least some retail investors. That’s the first prong. If you can get past that and you’ve done enough due diligence on the issuer, the product and trained staff, then you get to the customer-specific prong,” McCafferty said.

McCafferty also offered a test to determine if a complex product is in the best interest of a client and their goals and objectives.

“Once you’ve weighed all of that, as well as reasonably alternative products that are not complex products, you should have a good baseline on why that complex product is a good thing” for purposes of documentation, she added. 

Firms should also make sure their due diligence on products and issuers is kept up to date, including making sure the information a firm collected initially is still valid and asking if there are new individuals involved with an issuer that may raise some red flags.  

“The last thing I’ll mention is concentration,” McCafferty said. “I just heard in a session about a client who is 80 and 90% of their liquid net worth is in one product. Particularly if it is a complex product, that really on its face would not appear to be in the client’s best interest. These are the areas where we’re seeing the biggest concerns from an exam perspective.”

Wendy Lanton CCO Herold and Lantern Investments, Inc., said that the documentation piece of Reg BI is one where firms struggle. “As the SEC says, ‘you always have to consider cost, but it doesn’t have to be the only consideration. You don’t have to choose the lowest cost product,’ but without documentation we don’t know how to evaluate if this was an appropriate product,’” the veteran compliance expert told the audience.

Lanton urged firms to “match your product set to your firm’s identity” and make sure, especially with complex products, that they are right for some of your customers and appropriate to be sold by some of your advisors. 

“This is about thinking about your model and what you need to do to feel comfortable,  not just when a regulator comes in but day to day, that your advisors are thinking through all those issues,” Lanton added.