WASHINGTON — The SEC's Regulation Best Interest could tilt the playing field in favor of fee-based advisory accounts when the rule becomes the law of the land later this year.
That's the warning bell some industry insiders are sounding, positing that the terms dual registrants will be required by the SEC to lay out in a relationship summary document will persuade many clients that a fee-only account would deliver superior service over a conventional brokerage option.
"I think it's going to be more difficult for an advisor to sell a commission-based account, especially when a client has a dual registrant's Form CRS in front of them," Rob Molinari, chief regulatory affairs officer at Commonwealth Financial Network, said during a panel discussion at a recent conference that FINRA hosted on Reg BI.
"I think the Form CRS — probably not intended to be used this way — but I think it's going to be one of the bigger advisory account salesmen in the industry," Molinari said.
The SEC explains that the two-track approach in its advice regulation for advisors and brokers comes from a recognition that the two business models are distinct, and that the tailored rules aim to preserve both options for investors. Critics of the rule have countered that Reg BI will still permit brokers to operate with serious conflicts that could incentivize recommendations that put the rep's or the firm's interests ahead of the client's.
But Molinari and others see rule — and the
"It's a strong incentive, I think, to recommend a fee-based account," said Mark Cresap, president of Cresap, a dually registered broker and RIA based in Radnor, Pennsivlania.
As an example, he cites the language in Reg BI concerning account monitoring, which essentially forces brokers to commit to a prescribed monitoring program, or to expressly state that they will not monitor accounts in the relationship summary.
"If you commit to a duty to monitor, that means you have to establish a schedule of meetings with clients, and if you don't meet that schedule, you're deficient," Cresap said. "This I think is going to cause reps to rethink commission-based accounts very seriously because of the duties that it imposes or the duties that they're sort of going to have to disavow without impairing the relationship with the client. It's going to be tough."
At Commonwealth, Molinari said that the firm's CRS forms will be "quite clear" that commission-based accounts do not include monitoring services, which could be a factor for clients that weighs in favor of choosing a full-service advisory account.
More fundamentally, Molinari said he expects that clients will look at the basic terminology that dual registrants will include in their CRS forms and conclude that an advisory account is the better bet.
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"[E]ven if it's in their best interest to go on a commission-based account, they're going to see the standard of care comparison, where one's Reg BI and they're not sure what that means, and the other one's a fiduciary standard and they've heard that in the industry and on the news, and in their mind, that's what they want," he said.
SEC officials insist that the intention of the rule is not to regulate commission-based accounts of business. On the contrary, they have argued that the rule creates a tailored regulatory framework that accommodates the traditional brokerage model but with an added emphasis on disclosure and mitigation of conflicts.
In the run-up to the rule taking effect June 30, regulators are
For all those assurances, however, Reg BI exams and enforcement efforts remain a source of anxiety for some of the firms that will be subject to the rule.
"We all have these concerns, but the thing that we don't know is how Reg BI is going to be enforced," Cresap said. "If regulators come in guns blazing, it's going to be very difficult to maintain, I think, the transaction and commission-based model. So a lot of this depends on what is now unknowable, which is how are regulators going to approach this in the examination process."
