Under new rules governing many retail investment recommendations, firms may be considering technology solutions to connect and integrate disparate processes and systems.
Investment management firms have implemented new retail sales practices under Regulation Best Interest (Reg BI) amid challenging economic and workplace conditions prompted by COVID-19. As financial professionals deliver services to retail customers in observance of the new regulatory requirements, many are identifying ways the experience can be improved using technology.
“Many firms were not able to incorporate the desired technology enhancements to the investment recommendation life cycle under Reg BI in light of a tight timeline to meet the new requirements and limited availability of end-to-end vendor solutions at the time of the compliance date,” says Maria Gattuso, a principal with Deloitte Risk & Financial Advisory for Deloitte & Touche LLP. “Now that the regulation is in effect, many firms are seeking to implement their Day 2 initiatives, including considering further changes to make the process more effective and efficient for both financial advisors and their clients.”
Reg BI requires broker-dealers and their financial professionals to act in the best interest of retail customers when recommending securities transactions or investment strategies involving securities, account types, and rollovers. The SEC regulation took effect June 30, 2020. While acknowledging pandemic-related challenges, the SEC said Reg BI implementation should proceed as scheduled, and it planned to conduct more focused examinations beginning in January 2021.
The new standard requires broker-dealers and their financial professionals to not place their own financial or other interests ahead of the interests of retail customers. The general obligation can be satisfied only if the broker-dealer also complies with four component obligations, which the SEC’s adopting release characterizes as mandatory. These obligations are:
- Disclosure. Broker-dealers are required to provide written disclosure to retail customers regarding the scope and terms of the relationship, including material fees and costs that apply to the retail customer’s transactions, holdings, and accounts, among other information.
- Care. Broker-dealers are required to exercise reasonable diligence, care, and skill to understand potential risks, rewards, and costs associated with recommendations and have a reasonable basis for believing recommendations are in the client’s best interest. This requires considering these factors in light of a retail customer’s investment profile and the consideration of reasonably available alternatives offered by the broker-dealer.
- Conflict of interest. Firms are required to establish, maintain, and enforce written policies and procedures intended to identify and, at a minimum, disclose conflicts of interest. Under certain circumstances, firms may also be required to mitigate certain types of conflicts and eliminate other types altogether, such as sales contests, quotas, and bonuses based on the sales of specific securities within a limited time period.
- Compliance. Firms are expected to establish, maintain, and enforce documented policies and procedures reasonably designed to achieve compliance with the regulation, including preventing, detecting, and promptly correcting violation.
Accompanying Reg BI, the SEC also adopted new disclosure requirements under the Form CRS Relationship Summary directing investment advisors and broker-dealers to provide a written relationship summary to each retail investor. The summary must address services, fees, costs, conflicts of interest, the standard of conduct for the broker-dealer or investment advisor, and the disciplinary history of the firm and its professionals.
Manual Processes, Gaps
To meet the June 2020 implementation date, many firms established processes under Reg BI to take financial advisors through a common approach of interacting with clients and making recommendations that are subject to the new obligations, says Karl Ehrsam, a principal with Deloitte Risk & Financial Advisory for Deloitte & Touche LLP. “Often, firms enhanced existing business processes and workflows to enable financial advisors to make recommendations that are in a client’s best interest,” he says.
Although many firms have deployed some technology to establish new processes, some are still highly manual, Ehrsam says. “Financial advisors in some cases are performing duplicate steps and creating redundant documentation across recommendations, often because systems are not connected or processes are not enabled by technology,” he adds.
Where firms are using siloed technology solutions, they often do not provide a high-quality experience for the financial advisor or client. In some cases, they may make it more difficult to provide evidence that a process meets regulatory expectations. What’s more, firms may have unidentified compliance gaps if they rely solely on post-action detective controls to supervise financial advisor behavior.
Many aspects of the Reg BI recommendation life cycle can benefit from technology solutions that can address Day 1 compliance challenges and deliver on evolving regulatory expectations, says Craig Friedman, a senior manager with Deloitte Risk & Financial Advisory for Deloitte & Touche LLP. “By creating an end-to-end experience for both the financial adviser and client, these solutions are also well suited to enable ongoing remote work,” he says.
Streamlining, Automating Workflow
The Reg BI workflow process can be integrated and largely automated across the six steps in the recommendation life cycle, says Amitam Kumar, a manager with Deloitte Risk & Financial Advisory for Deloitte & Touche LLP. “Technology can connect platforms, data service providers, and wealth management client systems, including systems for order entry and books and records,” he says. Reg BI compliance can be built into the various stages of the recommendation life cycle in the following ways:
Prospecting, onboarding. Disclosures can be systematized, enabling them to be generated and delivered while also producing evidence to meet recordkeeping obligations. Data from existing systems, such as customer relationship management and account master systems, can be integrated and consolidated to reduce manual capture and administration.
Needs analysis. As financial advisors gather information on a client’s needs, data from disparate systems can be integrated to form a single repository for client profile information. Financial and goals-based planning can be embedded in the analysis tool to help guide the financial professional’s advice, integrating recommendations that are consistent with the client’s best interest.
Research. Research workflows and tools can contain embedded cost considerations and reviews of reasonably available alternatives to streamline the process. Reasonably available alternatives to recommendations can be presented and considered based on product and firm-defined criteria across workflows and tools. Third-party data providers and home-office product coverage can be leveraged to guide research.
Recommendations. To enhance the interaction between financial advisors and clients, recommendations can be created and delivered digitally. Relevant documentation, including disclosures, can be automated and retained in output to books and records systems. Firms may take a risk-based approach to the investment they make in technology for the recommendation process, with greater investment to support complex and costly recommendations, such as rollovers, account type, and variable annuity recommendations, where there may be an enhanced need for process automation and documentation. Firms also are investing in technologies to enhance the supervision of these recommendations, including technologies and analytics to monitor compliance with conflicts-of-interest policies and detect unwanted sales practices.
Client review, acceptance. Clients can review and accept recommendations with electronic signatures, even on mobile devices. Interaction and acknowledgments can occur in real time. Supervisory controls, including Reg BI approvals and reviews, can be digitized and embedded as well, enabling real-time supervision.
Execution. Financial advisors can execute recommendations using a single order-entry platform, with preventive controls embedded into recommendation workflows.
In addition to enabling the recommendation life cycle with technology, firms may also be considering ways to manage the compliance aspects of the new regulation using technology, says Gattuso. “Some firms are experiencing challenges in demonstrating to their regulators that they have policies and procedures in place to produce compliance with the four component obligations of Reg BI,” she says. “This is also an ongoing area of focus for firms as they continue to take measures to comply.”
—by Tammy Whitehouse, Deloitte Services LP, senior writer, Deloitte Insights in The Wall Street Journal