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May 26, 2021 at 11:22 AM
The next few years will be all about regulation as broker-dealers figure out the proper balance of Regulation Best Interest’s disclosure, tracking and recordkeeping. Advisors at some broker-dealers tell us the new disclosures required to satisfy regulators have become suffocatingly unacceptable, though not much has changed at other firms.
The future balancing act for most broker-dealers, though, will be implementing enough disclosures and recordkeeping to avoid fines but not so much that their advisors find the paperwork and related requirements oppressively long and complex.
Geneos Wealth Management President and Chief Compliance Officer Jodee Brubaker-Rager feels that by having its own technology firm, the BD has been able to make the required changes to supervise and electronically maintain records in order to comply with the new rules. Still, creating multiple disclosure forms and supervisory systems has been a bigger project than it first anticipated.
But Geneos is the exception and not the rule. Many firms are likely to discover how deficient their recordkeeping is when fines are imposed on them over the next year or so. Plus, disclosures and supervision aren’t the only aspect of Reg BI that will be problematic going forward.
‘Bad’ Commissions
Reg BI has demonized regulators’ perception of commission-based products to the point that they look at, for example, variable annuities as “bad” and also earning commissions (rather than fees) as “bad.” If an advisor or compliance officer is being questioned over a variable annuity sale, they find it to be: You are guilty until you can prove your innocence.
Many firms have become downright paranoid about commission-based sales and the potential blowback from regulators, making advisors’ ability to have commission-based business increasingly difficult.
This likely will be a primary driver in reduced commission sales in the coming years, and that will especially affect BDs that rely more on sales tied to commission-based mutual funds, variable annuities, alternative investments and fixed indexed annuities.
Fee Revenue Under Threat
Strong sales of exchange-traded funds already have cut into mutual fund sales. This is a revenue disruptor for broker-dealers, since mutual funds have substantially higher revenue-sharing arrangements than ETFs.
The trend toward more ETFs and fewer mutual funds appears unabated, so BDs’ mutual fund revenue is poised to keep diminishing. Also, fee-based accounts have their own issues in terms of expected revenue disruption going forward.
