There’s a thin line between what’s
best and what’s suitable enough when it comes to a financial professional’s
duty of care and loyalty to prospective and active clients.
State and federal laws and regulations
vary on driving their behavior, so many investors are left to hope they ask
smart questions and rely on a financial professional’s ethical compass. It’s
never been more important with, on one hand, so many Americans retiring and, on
the other hand, many saving as generous employer pension and retirement plan
Fear of investor confusion and a
desire to protect Americans was part of the reason the Securities and Exchange
Commission released Regulation Best Interest, a package of proposed rules and
interpretations designed to enhance the quality and transparency of investors’
relationships with financial professionals at broker-dealer firms.
Broker-dealers are commonly
compensated for effecting transactions, not for giving advice. This proposal,
if passed, could change that dynamic by changing compensation arrangements and
product sales incentives that often drive financial professionals’ behavior.
But what if it also leads to fewer
options for professional help as SEC Commissioner Hester Peirce mentioned in a
The new Regulation Best Interest
requirements could also spur the growth of robo-advisers and other online
investing platforms to fill that potential void. Technology is innovating many
parts of the financial services industry including how financial advice is
delivered to retail investors.
While we wait to see what the next
step will be on Regulation Best Interest, compliance officers and other
gatekeepers should take a sustainable governance approach and consider adopting
best practices for re-aligning sales incentives as well as vetting online
As year-end approaches, compliance
officers could conduct an inventory and assessment of potential conflicts with
compensation, sales practices and products. This is also an opportunity to help
ensure digital advice tools provide objective and balanced advice. That means,
among other things, asking questions about assumptions used in simulation tools
and algorithms as well as being vigilant about how projections are displayed
and conflicts are disclosed.
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