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Regulation and Compliance > Federal Regulation > DOL

How the BDs of the Year Are Prepping for Reg BI

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Lon Dolber (left), Ralph DeVito, Amy Webber and David Stringer; photo by Tom McKenzie

What are your thoughts on Reg BI, which has July 30, 2020, as its start date?

Ralph DeVito, The Investment Center: We are starting with what we did with DOL. We think it fits pretty well, though there is going to be a lot more that has to be added once we analyze it.

It’s been a long haul. I don’t know how much more best interest we can get into our procedures. We’ll have to discuss more disclosure, a lot more disclosure.

David Stringer, Prospera Financial: It seems like we’ve been dealing with the standard of care now for over a decade, … and that the heavy lift we did was with DOL. We levelized compensation and eliminated a lot of our conflicts.

We feel like we didn’t back off from any of that. We just didn’t go to the deeper disclosures they were requiring in that final, final push on DOL. This [Reg BI] doesn’t feel as scary.

DeVito: We trimmed back product, choices … at the high end and low end, and big [trailing commissions].

Stringer: A lot of the work has been done. Now we just had to do the nuanced BI work. The bigger lift is going to be just educating the advisors on how this impacts their business and some of the changes that are going to happen. Change management is always a little difficult.

Amy Webber, Cambridge Investment Research: For us, there was a lot of DOL development. Some of this we implemented, some we made optional and that some advisors implemented, … and some that we set aside until we saw what this final rule looked like.

We still feel pretty strongly that we have to get further guidance from the SEC, as there’s a lot of ambiguity there. We are creating a long list, along with the Financial Services Institute and other firms, of some places where we would like clarity.

We actually created a risk committee within the firm. That’ll probably be a permanent fixture, just like an investment committee or due diligence committee, so that we can just constantly be evaluating these things.

One thing on the advisor side that will be most intriguing is that we’ve got to automate the decision tree that they use. We know duty of care and duty of loyalty; advisors have rationale behind the decisions that they make.

But our interpretation thus far is that that documentation needs to exist right out of the gate for why you choose advisory over non advisory. We have to be able to automate that decision tree for them. That’s where the biggest game changer is for advisor behavior.

Lon Dolber, American Portfolios: I’m a bit concerned about the states. There’s no real harmony with this whole thing. Some of the states definitely have their own ideas about it. You would think that all regulators would come together and be harmonized on this — from FINRA to the SEC to the state regulators. Can’t we can adopt one rule? Wouldn’t that be nice?

Webber: That would be nice. I don’t think that’s where we’re headed.

Dolber: There are some states that have completely different ideas about this. So the states are flexing their muscles and their authority. You could be complying with the SEC but you may not be compliant with the state.

Webber: There are at least four of them out there. That’s also the risk committee’s role — to settle the differences between what the states rule, when they are finalized, and how to comply.

DeVito: We have the SEC, FINRA and multiple districts that interpret things differently. We had 50 insurance divisions and the states that can go after you.

Stringer: Kind of like with alternative products. Massachusetts set this bar on how much you can put into them. You could deal with this patchwork of different nuanced fiduciary rules and just go to the lowest common denominator.

It would be nice for the end investor not to deal with these different standards. I mean the whole point of this standard dialogue is to create a uniform standard that we can all live with.

Dolber: Do the [investor] clients understand the difference between the suitability standards?

Most clients still probably won’t understand the difference. They’ll say, “Well, I figured you always act in my best interest.”

Stringer: We built a quantitative analysis tool for our advisors. If you’re going to do an exchange or put this product in there and sell that product, do the math calculator. You can see if it’s in the client’s best interest from a cost perspective. That seems to be the primary lens the regulators see.

Dolber: What happens when they start looking at performance? That’s the next step — to analyze cost against performance.


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