It’s been a bull market for over a decade, and financial advisors around the country have enjoyed a nearly unchecked ability to manage their own businesses and their client’s assets as they see fit. However, much like the markets, what goes up must come down, and advisors may need to face a new reality when it comes to government regulations and business management.
A Growing Trend
In recent years, there has been increased scrutiny on how financial advisors — especially sole practitioners and small registered investment advisors — manage their own firms. The regulatory focus is shifting towards ensuring continuity of service to clients in order to better protect their interests and investments.
On June 30, 2020, the Securities and Exchange Commission’s Regulation Best Interest goes into effect for broker-dealers, RIAs, and dual registrants with a goal of improving the transparency and quality of investor relationships. This includes recommendations of account types, rollovers or transfer of assets, and implicit hold recommendations arising from any agreed-upon account monitoring arrangement.
Reg BI imposes a new standard, beyond existing suitability obligations, to act in the best interest of the retail customer at the time a recommendation is made without placing the financial or other interest of the broker-dealer or associated persons ahead of the interest of the retail customers.
In 2016, SEC proposed another rule to mandate “business succession and transition plans” for the financial advisors the agency oversees. This proposal is stalled and there is currently no federal law requiring advisors to have a succession plan in place. However, according to the North American Securities Administrators Association, at least 12 states require RIAs to have business continuity and succession plans in place that minimize “service disruptions and client harm that could result from a sudden significant business disruption.”
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For example, Massachusetts has taken steps to adopt its own more stringent broker-dealer conduct standards. In November 2019, William F. Galvin, Massachusetts Secretary of the Commonwealth, signed off on new regulations that would impose a uniform fiduciary conduct standard on broker-dealers, agents, investment advisors, and investment advisor representatives when dealing with their customers and clients in the state.
According to Galvin’s announcement, the proposed changes to existing regulations are expected to increase accountability in the financial industry and protect investors by subjecting investment advice to a true fiduciary standard, which includes having a succession plan in place. Municipalities and pension plans would receive the full protection of the heightened conduct standard, along with individual investors.
“I am proposing this standard because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry with its ‘Regulation Best Interest’ rule,” Galvin said. “My office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice,” Galvin continued. “Investors must come first.”
What’s an Advisor to Do?
As the regulatory climate continues its seismic shift, financial advisors need to begin planning to ensure they remain compliant with new government mandates while meeting client expectations. Here are a few tactics that advisors can implement now to protect themselves and their clients.