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As the industry events slow down for the holidays, we thought of sharing our notes from conferences we attended throughout the year. There were several conferences, like the October 2019 NSCP National Conference, that provided updates related to retirement assets and RegBI. Regulators recognize that the U.S. has an aging generation of adults who own the largest pool of assets in the marketplace with their retirement accounts. Coupled with a seemingly broken social security system, regulators want to ensure those assets remain with the investors, and not the scammers or nefarious financial service providers.

Retirement Plan Assets

The SEC is watching advisers who regularly recommend clients roll assets out of an employer-sponsored retirement plan (or from another adviser or broker-dealer) to a qualified account under their management. Although the DOL Fiduciary Rule officially died in 2018, regulators enforce the spirit of the Rule. If you have never had a prospect that you recommend stay with their current plan, be prepared as you’ll likely face scrutiny. You should review and document information provided to a prospect, especially if your adviser’s services are going to be more expensive than a prospective client’s current plan. 

At a minimum document: 

  • Costs associated with the current retirement plan versus the cost of the assets managed by your adviser.
  • Evidence that there’s a significant benefit to moving current assets under your management, making the additional expense worth the change. 

Advisers should understand that using the argument that a prospective client will have access to a greater choice of products will not be viewed as a sufficient reason for the change. 

Form CRS

For those SEC-registered investment advisers, the Form CRS is going to be a challenge. Conceivably, the states will be able to postpone or force changes in the Form through their lawsuits against the SEC. If not, the earliest date to file is May 1, 2020, and the latest is June 30, 2020.

Regulation Best Interest

Although Regulation Best Interest (RegBI) is SEC regulation and only applies to SEC-registered advisers, it’s more than likely the states will follow suit with similar rules or implement Reg BI through best practice recommendations. Erring on the side of caution, it’s imperative that all advisers are thorough in the collecting, updating, and maintaining of client suitability information. Not only should there be current and adequate suitability information on file for each client, but each client portfolio should be managed according to the objectives and needs outlined within the suitability information.

Let’s look at an example of two clients:

  • Client A is looking for aggressive growth and is not averse to risk. 
  • Client B is looking for current income and is averse to risk.

It is highly advisable that you don’t have them invested in the same group of products. In this situation, it’s doubtful that the allocations can be made in a way to accommodate both an aggressive growth and current income portfolio.

Additionally, if you have a client that’s in fixed income products and doesn’t require any type of active management, you truly shouldn’t be charging that client your regular asset-based fee. 

Pro Tip: With these types of clients, it may be in the client’s best interest, and yours, to charge these types of clients an hourly fee for the time you spend meeting with them and reviewing the accounts or a much lower advisory fee.

Although this update isn’t a comprehensive view of what’s to come, it provides insight that while we currently have an administration that says they want less regulation, the securities industry continues to be one of the most heavily regulated industries. It’s essential to keep on top of your compliance program and be familiar with the updated rules and regulations. If you have questions, please reach out to the Red Oak team.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.