Reg BI: A Compliance ROI Model

With the introduction of Reg BI (Regulation Best Interest), wealth firms will be expected to implement the most significant wealth compliance reform in decades.  The Reg BI implementation deadline in the US has recently passed on June 30, 2020.  While most firms have met basic compliance requirements, many have deferred compliance technology decisions as the industry awaits SEC and FINRA examinations.

While there is often industry opposition to new regulation, many stakeholders view Reg BI as being positive for the industry overall.  The concept of putting the client first and acting in their best interest is a common compliance theme for regulators worldwide and is broadly supported by dealers and advisors.

Implementing the various aspects of these “best interest” regulations will require a mix of new processes, training and technology.  One of the more significant aspects of Reg BI is the care obligation which relates to suitability and KYP standards.  Specifically, the requirement for broker-dealers to monitor investment products on their shelf and for advisors to consider a reasonable range of alternatives will require a mix of process and leading-edge technology solutions.

According to BCG’s Global Wealth 2020 Report, “over the past decade, wealth management providers have faced an unprecedented surge in regulatory requirements and scrutiny. But rather than design an integrated operating model to address these issues, most fell back on ad hoc responses that generated isolated processes, teams, and tools. The result has been a massive spike in costs and a huge administrative burden that has slowed response times, contributed to mounting client frustration, and heightened the risk of error.”

The assumption that compliance is purely a cost center merits reconsideration. As firms evolve into new markets, new products and partner ventures, their compliance programs must also evolve. Seen in this light, the compliance function can provide measurable returns that justify investment. Indeed, a strong compliance program can sharpen a company’s competitive edge.  When a company’s compliance function is strong and effective, its success often is measured by what doesn’t happen: fines, legal sanctions, lawsuits, negative press, reputational damage, lost business and market share.

If we look at a simple Reg BI ROI model based on the reduction or elimination of client attrition, the math is compelling.  According to PriceMetrix, financial advisors lose 10% of their clients on average every year.  A CFA Institute/Edelman study reported that the top reasons that clients leave their advisors relate to trust.  “Strong performance alone is not enough for investment management professionals to earn investors’ trust.”  In addition, the survey found that investors value and expect certain behaviors from their financial services professionals: to work under formal ethical codes or professional standards; to be transparent about all things, including business practices, fees, and potential conflicts of interest; and to act responsibly during an issue or crisis.  Investors care that their interests are promoted and want those interests to come before those of the financial professionals and their firms.  The objectives of Reg BI are designed to address these very issues.  Effective Reg BI compliance will position dealers and advisors to avoid or reduce client departure risk.

In a recent Kitces Research survey of more than 800 financial advisors, the average total cost for a financial advisor to acquire a new client (or replace a departing client) is $3,119.  Considering the widely accepted rule of thumb that acquiring a client is five times more expensive than maintaining existing clients a $600 annual investment in advisor technology to support best interest compliance is justified by protecting just one client!  In addition to this 500% ROI model, additional benefits that accrue to the dealer through enhanced supervision and digital transformation make this compliance investment even more compelling!


Article by: David Reeve, CEO of InvestorCOM

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