The SEC's recently adopted Regulation Best Interest has spurred many industry participants to focus on the challenges for compliance. Often the typical response to a new regulation is to ask: "What can we do to satisfy this regulation and keep business as usual?"
Indeed, many have criticized the SEC for making its rule soft enough that business could continue largely as usual, unlike the DOL fiduciary rule, which was expected to change the landscape for the brokerage business model in a more drastic way.
But why is this necessarily the approach to regulation? Could regulation actually be a business opportunity that might allow some firms to distinguish themselves from their competition? If embraced, business strategy and regulatory compliance could be very complementary, especially in an age where investors are seeking greater transparency and comparability in investment services.
Here are three ways Reg BI could be an opportunity for business:
1. Keep it simple. Brokers could compete on the financial education pieces — those that are part of Form CRS as well as in the summary of material conflicts to make the fees and conflicts super clear.
Simplicity will likely win the day here. A simple business model of "we charge X for Y service and we do not get paid to recommend any product" is certainly easier to understand than a more complex one.
However, there is opportunity for nuance. Financial education could be targeted to different demographic groups — women, minorities and retirees — on the basis that different challenges impact different groups and the broker is thinking more broadly about the best interest of each group. This goes far beyond the regulation and could be an opportunity.
For instance, showing women educational information about how early they should start saving to account for their longer life spans and the possibility of lost earnings if they take time out of the labor force to raise young children might attract them as clients if they think a broker is acting in their best interest.
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2. Optimization. Reg BI provides opportunities to optimize across broker-dealer versus investment adviser services. While brokers are conflicted from recommending certain products, what about rewarding one side of the house when the other gets business?
Broker-dealers should tell clients when they would be better off with an investment adviser and vice versa. This way one gets rewarded whether bringing business to one's own side of the house or to the other.
Brokers could then think more neutrally about rollovers — should they be charged on a transaction basis or an AUM basis for ongoing advice?
3. Holistic approach. Speaking of rollovers, how about using Reg BI to take a holistic approach to advice? Rollovers, about which the DOL was so concerned, can be great if they allow people to consolidate their accounts in one place, get advice on their investment allocation as a whole, and have someone monitor their account.
With a broker, this is typically not the service being provided. Investment advisers might gain a lot of business from Reg BI, and brokers could be the intermediary to help people make that choice.
In short, while business models will change, clearly the winners will be those who can make the changes to their business advantage.
Jasmin Sethi is the founder and CEO of Sethi Clarity Advisers, which serves financial industry clients.
