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How Reg BI Changes the Fiduciary Landscape for the 401k Plan Sponsor

How Reg BI Changes the Fiduciary Landscape for the 401k Plan Sponsor
September 10
00:03 2019

Over the summer, the SEC finalized Regulation Best Interest” (“Reg BI”). It becomes effective this week. In a June 5, 2019 SEC Press Release, issued by the SEC, Jay Clayton, SEC Chairman, stated, “This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”

Although it has received mixed reviews, it is clear Reg BI will impact investors, the industry, and, although many might not expect it, retirement plan sponsors. But how?

According to the final wording of the Rule as published in the Federal Register, Reg BI “will improve investor protection by: (1) Enhancing the obligations that apply when a broker-dealer makes a recommendation to a retail customer and natural persons who are associated persons of a broker-dealer (‘associated persons’) (unless otherwise indicated, together referred to as ‘broker-dealer’) and (2) reducing the potential harm to retail customers from conflicts of interest that may affect the recommendation.”

Furthermore, the official publication goes on to say “Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other things, to: (1) Act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and (2) address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where we have determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict.”

In short, Reg BI has a laudable purpose. The intention is to help people better discern the nature of their choices. “Reg BI enhances and harmonizes the standard of conduct for financial professionals when working with retail investors,” says Mark Alcaide, Partner and COO for Foreside in Portland, Maine. “It allows them a little more insight into potential conflicts of interest and it potentially gives them firmer ground when claiming restitution for conflicted service.”

On the face of it, the new Rule should allow clients to take a peek behind the curtain when selecting among various vendors. “Investors should be able to hire a professional with the peace of mind that there is complete and total transparency with the person or firm they’ve entrusted their financial future to,” says Zach Welborn, Senior Financial Advisor at Manske Wealth Management in Houston, Texas.

The SEC hopes increased expectations in the marketplace will create better client-provider outcomes. “Investors should feel more confident that their advisor is being held to a higher service standard across the industry, and that the advice they receive, at a minimum, should be objective,” says James Russell, Financial Advisor at Rehmann in Troy, Michigan.

Indeed, this higher expectation is spelled out clearly in the SEC’s press release. It states “Regulation Best Interest imposes a new standard of conduct specifically for broker-dealers that substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone.”

The SEC cites four separate and unique “obligations” broker-dealers must adhere to: 1) Disclosure Obligation; 2) Care Obligation; 3) Conflict-of-Interest Obligation; and, 4) Compliance Obligation.

This reflects the ongoing evolution of regulation investment advice that brings the industry closer to a uniform fiduciary standard. Russell says, “Principle driven advising is becoming the standard mode of operation within the industry, it’s no longer good enough that an investment is simply suitable for a client.”

Reg BI slowly begins to bring all service providers under one common regulatory umbrella. “This is a step in the right direction for the financial services industry – creating a level playing field and standard of care will only elevate the industry as a whole in the years to come,” says Welborn.

Yet, the SEC’s effort falls short in fashioning true uniformity. As a result, investors seeking an easy-to-understand apples-to-apples comparison between providers may continue to be frustrated. Still, the SEC has its reasons for this. “The SEC preserved the two business models, so, although not fiduciaries, brokers can compete leveraging their unique business model,” says Alcaide. “Rather than limiting abilities to compete, it more clearly defines them so they can specialize.

While it’s clear how Reg BI impacts both investors and the industry, less clear is its impact on the institutional side of the market. Reg BI specifically address only the retail market. Still, retirement plan sponsors can be impacted by it nonetheless.

For one thing, as employees transition from their company sponsored plan to their own personal IRAs, they move from the institutional to the retail. Since this transition can and often does occur within the company plan environment, plan sponsors need to be up to speed on the fiduciary implications of Reg BI.

In addition, there’s bound to be a spillover effect in the way the industry addresses the retirement plan market. Although under the purview of the DOL, retirement plan service providers regularly serve retail markets, too. It would make sense for them to adopt the higher standard for both markets, even if the DOL remains silent.

This implies 401k plan sponsors currently with those impacted most by Reg BI may find they will see new experiences. “The Reg BI change will allow traditional RIAs to continue with business as usual allowing them to fine tune the services they already offer,” says Welborn. “Most brokers will likely experience a bit of a learning curve while they realign and elevate their offering to be competitive with traditional RIAs.”

Just as summer changes into fall, Reg BI will change the way all participants – investors, service providers, and 401k plan sponsors – interact with each other.

Rest assured, however, the impact of Reg BI won’t be felt immediately. Although it becomes effective this week, providers have until June 30, 2020 to begin complying with Regulation Best Interest.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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