Financial services need an updated regulatory framework

The financial advice profession has undergone tremendous change in recent years. Clients have increased expectations and a digital-first mindset, products and services have become more sophisticated, and the technologies driving advisor-client communications have progressed dramatically.

All industries and professions, of course, have to move forward. However, evolving successfully in financial services is often more difficult because the industry operates under a complicated set of regulations – many of which are over 90 years old.

And that's the issue. Not only is the regulatory framework intense, but it's outdated. This dynamic has created a layer of uncertainty for thousands of advisors across the country. Many of them, of course, are independent, meaning they are business owners, not employees of a Wall Street institution with massive resources, which complicates matters further.

Archaic rules of the road

As any business owner can attest, increasing revenue and acquiring new customers under ideal conditions can be challenging. It's harder still when the rules of the road are archaic and, in some cases, at odds with innovation.

Ultimately, though, the implications of having a thicket of complicated, costly and confusing financial regulations are most profound for investors. For example, consider how ongoing technology advancements and shifting consumer behaviors are impacting the delivery of advice.

Increasingly, investors want to engage with their advisors using the latest communication channels, including secured messaging applications, video conferencing platforms and AI-powered tools. The problem is that while many advisors want to embrace such channels, using them can get them into hot water.

That's because SEC established regulations regarding the interactions between advisors and clients for an era when meetings were face-to-face or over the phone. Therefore, the current rules discourage the use of contemporary communications vehicles. That effectively creates an artificial hurdle to accessing advice, particularly for young investors, all at a time when we should be seeking expanding access to it.

The definition of "accredited investor" is another example of how outdated rules harm investors. The concept is well-intentioned, seeking to ensure that only individuals with a certain level of wealth, income or sophistication can invest in unregistered securities, such as private placements or hedge funds.  

However, the SEC has revisited what constitutes an accredited investor only four times since 1982. Accordingly, many advisors who work with sophisticated investors cannot provide them with access to certain products that are designed to meet unique financial goals and needs.   

Another outdated rule involves payments to ensemble practices – a model that allows advisors to provide clients better service and the industry to attract young professionals. Ensemble practices aren’t a new idea, but they’ve gained momentum in recent years as independent advisors increasingly join forces to boost efficiency.

The issue is that SEC rules only allow commissions to be paid to individuals, not ensemble practices. As a result, these groups can face hurdles accessing commission-based revenue, making it harder for them to cover key expenses like paying staff and recruiting new advisors – both essential pieces of attracting next-gen talent.

Better rules help everyone

A clearer and more modern regulatory framework would allow financial advice-based businesses of all sizes to operate with greater confidence and efficiency. This, in turn, would expand access to financial products and advice while making it easier to cultivate the next generation of advisors.  

The time has come. Regulators need to update their rules to reflect today's investment advice landscape. It's what the financial advice profession needs and what investors deserve. 

Dale Brown is the president & CEO of the Financial Services Institute.