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The Potential Impact of Regulation Best Interest on the Brokerage World

John W. Ohl, CEO Bay Colony Advisors - April 13th, 2020

The SEC’s Regulation Best Interest (Reg BI) rule is likely to have an impact on most financial advisors. Advisors operating through brokerage firms are going to feel the largest impact.  Broker-dealers will be subject to a heightened standard of care when dealing with retail investors. Overall, the Reg BI is forcing all investment services firms to set up their standards with regards to transparency to clients.

The goal of the rule is to establish a more stringent set of rules compared to the current suitability rules for advisors.  Form CRS will require a relationship summary document be provided to retail customers to explain the relationship between the investor and their broker (or investment adviser) and the attendant fees.  June 30th is the implementation date. 

The confusion behind the rule comes down to what the definition of “best interest” is and how brokers should adhere to the rule to put the best interest of the client in place.  The forefront of the challenge will come for advisors rolling over client 401(k) plans to individual retirement accounts. 

For dually registered advisors, Reg BI is likely to cause confusion and challenges when attempting to differentiate the advice provided through Broker-Dealer activities vs Registered Investment Advisor activities.  Advisors making recommendations while acting as a Broker will need to adhere to the Reg BI rules and regulations to ensure the advice provided is in the best interest of the client.  As is always the case, documentation is going to be key. Any miscalculations or unsuitable product recommendations will likely expose advisors to be in non-compliance.  

There are other more complicated nuances to the rule as well.  When advisors agree to simply monitor a client’s account instead of actively managing it, they will need to put certain disclosures in place to ensure the monitoring is in the best interest of the client. Other examples may be financial planning for a fee when investments or insurance products are end recommendations of the financial plan. 

The bottom line is that Reg BI will likely complicate and disrupt daily business for advisors affiliated with Broker-Dealers.  Advisors currently operating through a Registered Investment Advisor are already held to these standards.