SEC advice rule brings tech focus back to compliance

After turning attention toward next-gen platforms and client experience, broker-dealers may have to rethink technology to comply with a best-interest standard

Jun 21, 2019 @ 4:34 pm

By Ryan W. Neal

The Securities and Exchange Commission's new reforms on financial advice could push firms to rethink how they invest in technology.

Technology vendors say they've experienced a flurry of incoming questions from broker-dealers, registered investment advisers and insurance providers about how technology might help them comply with the SEC's Regulation Best Interest.

At top of mind is ensuring that the technology can help demonstrate to regulators the reasoning behind investment recommendations, said Adam Holt, CEO of adviser technology firm Asset-Map. He said Asset-Map already has heard from three of the largest financial services firms asking what they need to keep advisers in compliance.

"Best interest advice gets sticky when the financial advisers get questions as to how they came to their recommendation," Mr. Holt said.

Firms, especially broker-dealers and insurance agents, need more documentation, workflows and client validations proving "a very clear and prudent process was used."

Reg BI is pushing compliance back to the forefront of firm conversations about technology, Mr. Holt said. Since the death of the Department of Labor's fiduciary rule, compliance took a back seat to modernizing the firm's core tech stack with new marketing and client experience tools.

(More: Top performing advice firms have a distinctive focus on technology)

"However, we think that managing that technology in light of this new regulation is going to move to the forefront of conversations once again," Mr. Holt said. "This may distract from the momentum a lot of firms have achieved in reviving their tech tools and now re-prioritize compliance with the regulation."

Riskalyze chief investment officer Mike McDaniel said questions from across the advice industry reached a fever pitch in the first week after the SEC revealed Reg BI, but has calmed down a bit recently. But he said firms are taking a different approach after the DOL's head fake.

"Many of them took precautions prior to [the fiduciary rule] going live, and then it never ended up going live," Mr. McDaniel said. "They'll probably wait until the last second this time."

Many large firms already have tools in place to comply with a best interest standard, he added. It's the smaller broker-dealers and insurance firms that have the most work to do.

Some firms see the SEC rules as an opportunity to further a technology agenda they already have.

"Firms are reluctant to roll out new technology that is forced upon their advisers. This allows them to say, 'hey we're not the bad cop. We're doing this because of the regulations,'" Mr. McDaniel said.

Reg BI probably won't require much technology investment, if any, for RIAs, said G.J. King, president, RIA in a Box. But they will need to be careful with the new record-keeping requirements under the other part of the SEC's reform package: Form CRS.

Firms are now required to produce a standardized client relationship summary of information about services, fees and costs, conflicts of interest and the legal standard of conduct, and to disclose any disciplinary history related to the firm or the adviser. Mr. King said many RIAs were caught off guard by this and are unsure of how it impacts them.

(More: SEC clears up confusion over whether advisers can continue to call themselves fiduciaries)

"In the last five days, we've had more questions about fiduciary than in the last three years," Mr. King said. "But to be fair, I don't think this is going to require new technology purchases for RIAs."

Prosperity Advisory Group CEO Paul Ewing doesn't expect the SEC reforms to have any impact on technology strategy at his firm, nor at his affiliated broker-dealer, Cetera Advisors. He said he doesn't know of advisers who shelved technology investments made towards complying with the DOL fiduciary rule.

"Cetera made the decision to become advice-centric, and we're still on that path," Mr. Ewing said.

If anything, Reg BI will just make the adoption of certain technology tools and workflows more of a priority, especially for documenting decision making and the delivery of services.

"The days of back-of-the-napkin-ing, those are going away," he said.


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