Regulatory compliance continues to be a top priority and cost center for wealth management firms. The preparation for and implementation of Form CRS and Reg BI increased the budget and resources wealth managers spent on compliance activities.
The median implementation cost for Reg BI is $3.28 million, with 54 percent of those costs attributed to technology. Firms focused on choosing and investing in the right digital solution will have an advantage in staying ahead of changing regulations.
Here are some of the early results from Reg BI and Form CRS, what concerns regulators see already, and how financial advisors and home office professionals can adapt their processes to meet compliance requirements more efficiently and build a more reputable relationship with their clients.
Early Feedback from Regulators on Reg BI Compliance
Overall, regulators agree that firms are rising to the challenge of this new rule. Attempts to meet compliance requirements have so far been enough, but that may not last. Soon, regulators may expect stricter adherence to the rules.
The Form CRS continues to be the primary source of problems for firms. Feedback about inadequate compliance includes:
- Links to Form CRS are not displayed prominently and are hidden in links with other documents.
- Forms are written in vague or boilerplate language instead of the plain language the rule requires.
- Firms answered incorrectly or lacked required information in the disciplinary history section, including giving a qualitative explanation instead of a simple “yes” or “no.”
Because of some of these issues with Form CRS, the SEC updated its FAQs and revised their guidance to help wealth management firms meet the requirements and spirit of the rule.
Reg BI Tips for Financial Advisors
Operationalizing Reg BI requirements is a significant challenge for firms. Many firms have had to make substantial adjustments, including but not limited to changing technology, systems, and advisors’ relationships with their clients. Specifically, a Deloitte survey found that 36% of respondents ranked defining best interest as the most challenging operating model change.
Advisors shifting from a simple fiduciary requirement must clearly describe the differences in a transactional and advisory (fee-based) relationship. Using Reg BI as an opportunity to turn compliance into trust can build and reignite client relationships. Form CRS’s essence is documenting the rationale for recommending a specific fee structure and embracing fiduciary advice.
Investors today want transparency, simplicity, clear costs, and communication about fees. Taking the compliance conversation deeper than only meeting guidelines helps investors feel more confident and safe in who they go to for investment advice.
Reg BI Tips for Home Office Professionals
Documented processes are the standard for any compliance program. Documentation is also where firms should start when they consider Reg BI. But, treating Reg BI as merely an extension of FINRA standards is missing the mark. Firms should tailor their compliance and documentation for individual business models.
For instance, written policies and standards should not mirror the written regulations. Reg BI requires that these policies fit their business models, including documentation of alternatives for customers, considering costs.
Cost considerations are a critical component of Reg BI, and the SEC FAQs include special callouts for IRA rollovers. Firms should write these disclosures in language clients understand and explain why they recommend a particular course of action, fee structure, or product.
Finally, conducting a conflict of interest audit can uncover gaps in compliance and fortify documentation for regulators. Firms should review payout grids, product menus, and sales practices and consider each of these factors from the client’s perspective.
When writing policies, firms must identify and disclose all conflicts of interest and mitigate any conflicts that might put their interests above the client’s interests.
The regulatory burden on wealth management firms is a significant cost center. Taking a holistic approach to compliance, considering the customers’ perspective, and seeking to build trust and a partnership with clients is key to not only meeting but exceeding regulators’ expectations for Reg BI compliance.
About Docupace:
Docupace is a leading digital operations technology provider that simplifies how wealth management firms process and digitize data, increasing efficiency, productivity, and profits. With the secure, cloud-based Docupace Platform, the Docupace team provides a suite of digital solutions that helps broker-dealers, RIAs, and their advisors streamline and automate client onboarding, document management, advisor transitions, Regulation BI, cybersecurity, and other critical workflows while maintaining SEC and FINRA compliance. With headquarters in Los Angeles, California, Docupace is proud to serve a variety of firms, including some of the largest in the financial services industry, through a combination of proven technology and hands-on service.
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