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How the Top BDs of 2020 Are Tackling Regulatory Challenges

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Investment Advisor: How is the regulatory environment affecting your business? And is it pushing you more towards RIA vs. BD?

John Burmeister, Lion Street Financial president and CEO: Regulation — whoever’s in the office — is not going to go backwards. Where broker dealers and RIAs will succeed is they’ve got to have complete objectivity with the products that they offer. If you have a firm that is advisory only, it’s limited when it comes to what’s in the best interest of the client [even] if another product is suited [better] for a client’s needs.

Lion Street’s integrated platform with our life insurance side … allows us to be a little bit more nimble when it comes to regulatory changes. [Because of our] setup, we were able to minimize some of the expenses when [Labor's fiduciary rule] first came out.

We don’t have any proprietary technology, so we didn’t have to spend millions of dollars to change the system. We were able to operationalize the rule, and then we did the same thing with the Regulation Best Interest.

Reg BI was a bit more painful as we saw that regulation come to fruition, and we don’t know exactly how it’s going to be enforced. The biggest question is when enforcement comes and looks at what we rolled out as an industry, and when they go to our individual firms and offices, did we roll it out properly with what they envisioned?

Amy Webber, CEO, Cambridge Investment Research: I’m hearing that the SEC is already auditing firms, so buckle up. We all want to work together to make this work, [but] two weeks in and the first firm informed me that they had gotten an inquiry and [the SEC was] coming in to audit.

Regulation is going to continue to be an area of focus for all of us, whether we are on the broker dealer or on the RIA side. I also agree with John that my interpretation of what’s in the best interest of the client includes a firm be able to do both. So financial solutions holistically are probably the competitive advantage of the future.

And I’m not sure, at least in my career time, that the broker dealer side will go away. It’s just transforming and evolving. Gone are the days that a broker dealer [only executed] transactions. And, for the purposes of the future, focusing on both sides is important. If the administration changes it will get worse before it gets better.

I just think our industry is going to have to stand tall, continue to advocate for ourselves, get engaged, get our advisors out in front of them, continue to educate no different than we’ve been doing for the last, in my case, 30 years. There is value of advice overall … and we are going to be the ones that can help our advisors continue to do what they need to do.

We can’t sit back and let things happen to us, which is why much of the industry should be rallying around the efforts to get to the SEC, both on the broker dealer and the RIA side, to continue talking about this rule.

Tell us what to do, we will do it. We are a resilient industry that wants to do the right thing. But coming to us after the fact and adjusting an interpretation isn’t really what’s in the best interest of anyone.

Lon Dolber, CEO, president and CIO of American Portfolios Financial Services: Rule enforcement making by enforcement is a tough one. For my company, we’ve always emphasized our systems and platform and our “Lean Six Sigma” improvements.

That’s allowed me to move to the left and right with the rulemaking changes. We can attempt to influence the government through organizations like FSI, and [serve] on regulatory committees, but we can never be sure that our influence is going to get the change that we want.

I put a lot of emphasis on having an agile development structure at the firm, and we’ve been easily able to move [on] changes in our platform, whether it’s DOL, whether it’s Best Interest contracts. It’s a combination of proprietary systems that we own and operate and integrated systems.

As far as I’m concerned, I can’t totally control what’s going to happen with [regulation] — I can try to influence and that’s why we are members of FSI — but I can only control what I do [at my firm] 100%. How I conduct myself here, how I manage my firm and how I manage our processes and how structured and disciplined they are, that’s my control elements.

Ryan Diachok, president, Geneos Wealth Management: I agree 1000% that regulation through enforcement cannot be the new normal for our industry. That has to change because it doesn’t make sense. It’s not helping anybody.

I sensed the industry underestimated Reg BI in the early phase of it getting rolled out and all the nuances of it. Then [there was] this frenzied activity as we rolled up to the deadline.

How are broker dealers doing in general with Reg BI? I think everyone did a really good job in our industry getting to that point of compliance. It took a lot of time and a lot of resources.

But when you really started diving into the minutia of the mechanics of how you’re going to supervise all the requirements, it was pretty daunting.

Back when it was coming out, we took a very pragmatic and common sense approach, which served us well. Without jumping into the deep end when things were announced, we tried to get a sense and a feel for certain aspects of the rule: how we needed to comply, what were the technology pieces we needed to build or put in place? So we feel like we’re in a good position.

Advisors are doing a good job of adapting as well. They don’t love change and they don’t love more steps to take to conduct business, but we make it as painless and automated as possible for them.

Inherently though, this rule is going to drive more towards the advisory side, just because the transaction side under the rule is much more burdensome to monitor.

I agree that having a broker dealer side — having the ability to offer transactional-based and advisory products — puts you in the best position for success, and for advisors to be in the right position with their clients to offer full best interest.

Amy, I had not heard that they’re already in offices. That’s obviously not something we want to hear.

Burmeister: The reality of Reg BI [is] we knew it was coming, but as was said, the realization of it, of the clients getting [so] many pieces of mail. It’s driven a lot of client questions: What exactly is this? As we knew that was coming, we had the time to prepare [and educate our advisors] on here’s how to respond to those questions.

But the feedback to the regulators is they are inundating the clients because we have to send [so much], not just this mass mailing at the beginning, but it’s in perpetuity that this is going to continue.

Do we see silver linings? It’s [certainly] driven adoption for e-delivery of statements, confirms, address changes. It’s also been a great cleanup for books and records.

We had many advisors that have moved over [and] guess what? Their clients are receiving the Form CRS from their previous broker dealer — even one advisor that had been with us a couple of years. So it was a good exercise to make sure that our data was accurate.

Diachok: Another concern I have is the unknown regulatory environment. I can’t remember a time when the political landscape had so much of a direct effect. It always has an effect, but during the Obama years, [the push was] for the DOL to get through some regulation.

Obama leaves and then the SEC [Securities and Exchange Commission] and Regulation BI [come in]. Now we’re coming to the potential end of an administration —and if [Democrat Joe] Biden wins, then that might be completely undone. We might go back to the DOL.

The big picture challenge for us is just what is the environment we’re going to be working under? Our advisors want to do the right thing. They want to be there for their clients, provide the valuable services that they provide in this industry. Just give us a roadmap that makes sense. The whipsawing every four years is the biggest challenge.

Regarding opportunities, No one could have guessed we were going to be a pandemic. But our industry is well positioned going into the next 10, 20, 30 years because it has just re-solidified the demand and the need for personal advice.

There’s lots of digital options, but … we are in a position as an industry to continue to grow what we’re doing and continue to offer those services with a blend of technology. Even better is that advisors are having more access to technologies to [aid] their relationship with their clients.

For a rundown of what the leaders of the 2020 Broker-Dealers of the Year think about the industry today and other topics, as well as a summary of the Runners Up, please click on these story links: