SEC Regulation Best Interest
The SEC’s Regulation Best Interest (Reg BI) standard of conduct enhances the existing suitability standard for broker-dealers, when making investment recommendations. Whether a retail investor chooses a broker, an investment advisor (IA), or a hybrid broker/IA, the client is entitled to a recommendation that is given in his/her best interest, and does not place the firm’s or financial professional’s interests ahead of the investor.
A key difference between Reg BI and the IA fiduciary standard is that the IA’s responsibilities include providing ongoing advice and portfolio monitoring over the course of the relationship. In the Advisers Act, this is referred to as a “duty of care and a duty of loyalty” in the context of broad investment portfolio management. Brokers do not have a duty of loyalty; instead, they must act in the retail client’s best interest at the time a transaction-specific recommendation is made.
Reg BI also prohibits brokers who do not also carry a FINRA Series 65 or 66 from referring to themselves as “financial advisers”; instead they are “financial professionals.” IAs may refer to themselves as “financial advisers.”
Reg BI Broker Requirements*
Disclosure Obligation: Provide certain prescribed disclosure before or at the time of the recommendation, about the recommendation and the relationship between the retail customer and the broker-dealer.
Care Obligation: Exercise reasonable diligence, care, and skill in making the recommendation.
Conflict of Interest Obligation: Establish, maintain, and enforce policies and procedures reasonably designed to address conflicts of interest.
Compliance Obligation: Establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Reg BI.
Ensuring Client Cooperation
To fulfill your duty of care obligation under Reg BI, you need comprehensive information about your retail clients’ entire investment profiles, including the types of accounts they own. If a client withholds relevant information about accounts and investments held away, it may be nearly impossible for you to make thoughtful “best interest” investment and account type recommendations.
Under Reg BI, you are required to assess the client’s investment risk tolerance, objectives, time horizon, longevity, investment experience, and history as an investor. You need to be especially careful to record complete, accurate data, as this is required by your supervisor and FINRA, as evidence that you have considered all key factors, to put the client’s best interests first. For some financial professionals (FPs), this means delving more deeply into clients’ financial situations than in the past. To learn more about your requirements under Reg BI, please review the FINRA Reg BI and Form CRS Firm Checklist.
Working with Highly-Private Investors
Some clients may hesitate to divulge details about all their financial holdings and not grasp why you need to have this information. They might view your inquiry as an invasion of their privacy, and they may prefer not to disclose that they work with other FPs. You might say…
“I expect that you may have investments at other institutions, which is perfectly understandable. In order for me to guide you properly as your [financial professional for investment purchases] or [trusted fiduciary for asset management] and make appropriate recommendations, I need to know your complete investment profile and the types of accounts you own. This is in your best interests and is actually required by our federal regulators.”
Some financial professionals may view Reg BI as somehow punitive, but I do not agree. The emotional side of Reg BI is that clients really want to know that you are truly doing your very best for them. They need to develop a high level of trust in you, to help ensure that they share important personal information and will keep you updated as their financial picture evolves over time.
A related issue that may concern privacy-oriented clients is the idea of a “trusted contact” – the person they authorize your brokerage firm to contact in limited circumstances for the client’s protection. They need to be reassured that naming someone as a trusted contact person does not give that person any authority to act on the client’s behalf, execute transactions or engage in activity in the client’s account.
Familiarity with Investment Products and Account Types
A key aspect of Reg BI is that you must be able to demonstrate strong knowledge of the products and account types you recommend. You must understand how a given investment has performed compared with others, and why you believe the product risk level and strategy are appropriate. Regarding types of accounts, you need to consider: services and products provided in the account, projected cost of the account, other account types available, services the retail client requests, and the retail client’s investment profile.
An open question in our industry is exactly how you will demonstrate that you have a reasonable basis to believe that a recommendation is appropriate for a specific client. Naturally, you need to review all the offering materials for products under consideration. You may also take advantage of online research tools to conduct product comparisons and assessments. At Infinity, we leverage the knowledge of representatives from approved asset management firms. We invite them to engage with our FPs, to teach them about their products and pro-actively update them on any product changes. Email records of these interactions help document the ongoing education process.
Client Relationship Summary – Form CRS
Form CRS is an SEC-mandated document described as a “brief relationship summary” that broker-dealers and IAs must provide to their retail clients and prospects. Form CRS gives the client information to consider when deciding to hire a financial professional:
Types of services offered by a firm
Fees and costs clients must pay for those services
Conflicts of interest
Required standards of FP conduct
Form CRS lists questions for the prospective client to ask the financial professional and provides a link to free and simple tools the person my use to learn more about investing. Delivering Form CRS provides an opportunity for you to be fully transparent regarding the services you offer and to reinforce the importance of the investor being transparent regarding the details of his or her investments and accounts. You may also discuss the value you bring to the relationship, and address any objections up-front.
*Source: Securities and Exchange Commission’s “Regulation Best Interest: The Broker-Dealer Standard of Conduct”, June 5, 2019.
Infinity Financial Services is a national, independent Investment and Wealth Management firm, founded with a vision: help enterprising financial professionals to grow truly independent, successful practices, leveraging leading-edge technologies and firm support. Based in Oakland, California, with branch offices around the U.S., Infinity's financial professionals offer an array of asset management, brokerage, insurance, financial planning, benefit plan, insurance, and risk management services.