The DOL’s Latest Standards: Thinking Outside the Checkbox

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May 9, 2018

Rather than viewing new regulation as a competing priority, we believe the new Securities and Exchange Commission’s (SEC) “Best Interest” guidance is a critical juncture that presents an opportunity for leaders to both drive compliance and increase their focus on experiences for both clients and advisors.

Looking ahead, firms have a compelling opportunity to think outside the check box.

After the Fifth Circuit Court of Appeals vacated the Department of Labor Fiduciary Rule, the Securities and Exchange Commission (SEC) has recently put forward new “Best Interest” guidance under Dodd-Frank. Continually shifting regulatory standards can be daunting for financial services leaders who face accompanying pressure to compete in disruptive environments, deliver on consumers’ heightened demand for seamless experiences, and generate sustainable efficiencies.

The SEC has chosen to tackle this in three proposed regulations.

Overall, the SEC has proposed a holistic approach to defining a Best Interest standard.  Many believed the SEC’s solution would be limited to prescribed disclosures, but the SEC delivered a “disclosures-plus” proposed regulation. The agency starts with the existing infrastructure and then enhances regulations to define investor “best interest,” and describe how to preserve it. Unlike the DOL rules that encouraged many firms in the industry to leverage level-fee investment products, the SEC believes that fee-based accounts are not always in the “best interest” of the retail customer and, with the appropriate information, retail customers can decide how they want to conduct business and how they want to pay for services. Underlying the SEC’s proposal is a belief that the retail customer will get access to investment advice, products, and services that would otherwise not be available to them.

The Regulation Best Interest requires a broker dealer to “act in the best interest of the retail customer at the time of the recommendation is made without placing the financial or other interest of the broker-dealer or natural person who is an associated person making the recommendation ahead of the interest of the retail customer.” This is a departure from the DOL that required the firm to hold the “customers interest above their own” (although the DOL did provide Prohibited Transaction Exemptions to deal with potential conflicts).

To ensure compliance, here are some of the most critical questions that we believe financial services firms should consider:

  • How will your firm process any needed changes in determining the retail customer’s Regulation Best Interest?
  • What changes and enhancements are necessary to update policies and procedures and how will the critical changes be engrained in your firm’s culture?
  • What type of communication strategy will need to be established when presenting new disclosures to your customer?

Common Reporting Standard (CRS) Relationship Summary creates a uniform notice to customers from any firm from which they seek advice.  There are three unique notices for broker dealers, investment advisors, and dually registered investment advisors and broker dealers.  The notices specifically describe services received; obligations of the firm; types of accounts offered; fees and costs; conflict of interests; other types of services and accounts available; and showing where information to research the firm and their employees exists. There are also 10 questions designed for customers to ask the firm.

The other notable item within the SEC regulation is defining who can use the word “advisor” when presenting themselves to the public.  Broker dealers cannot use the word “advisor” to describe the firm or its employees.

Critical questions for financial services firms:

  • How will your firm incorporate the proposed uniform notice into the customer experience during the prospecting stage?
  • Should your firm need to provide the answers to the 10 questions outlined in the relationship summary to ensure consistency?
  • How will you track disclosures presented to clients to meet recordkeeping requirements?

If you are a broker dealer, how will the firm describe itself when conducting business with the public?

Enhancing Investment Advisor Conduct focuses mainly on establishing a standard for investment advisor conduct, given no standard specifically exists under the Advisor Act.  There is a belief that most advisory firms offer fiduciary care, but the SEC wants to establish standards throughout the industry.  Standards were identified in the Section 913 Report covering systems in place to protect a customer, licensing, continual education, account statement distribution and defining the financial responsibility requirements for an SEC-Registered Investment Advisor.

Critical questions for financial services firms:

  • What types of education and training programs are needed to ensure employees of the firm understand how to better serve their client and meet regulatory requirements?
  • How are account statements and client communications sent to existing clients, and is there a better, more client-centric means of communication?

As firms grapple with the latest proposed changes and begin to implement them, it’s important to focus on creating an effective and compelling experience for both the advisor and the client. Many firms will only focus on the risk and compliance changes needed, but to compete and thrive, firms need to do more than simply check boxes. Firms need to focus on the critical questions at hand to examine the end-to-end experience, identify those moments that matter to the advisor, client and firm, bring those stakeholders into the discussion, and implement an optimal solution.


This post was co-authored by Frank Kimball:

Frank Kimball

fkimballFrank is an Expert Practitioner with the North Highland Company. He has over 25 years of experience in the Financial Service Industry. He has held executive leadership positions in Retail Brokerage, Asset Management, and Corporate Trust as well a senior member of Corporate Strategy. He helped create an award winning value-add program providing ERISA advice and proactive tools to help Financial and Private Client advisors at wealth management firms to grow their retirement practice. He has developed and managed infrastructures r sales organizations providing necessary tools to grow sales and retain clients. His primary focus is in Wealth Management, Compliance, Risk Management and Trust.

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