How to Simplify the Best Interest Recommendations Requirement
Since 2020, North American regulators have required financial professionals to assess costs and reasonably available alternatives when making best interest recommendations. During this time, InvestorCOM has helped thousands of financial professionals make millions of recommendations by intuitively assessing how key attributes of their recommendations compare to reasonable and available alternatives.
A key driver in making this process effective is InvestorCOM’s peer rating analytic.
Establishing a Peer Group
The first step to deriving a peer rating is to define or configure how to group similar securities.
A peer group will contain investment products that have a similar product type (for example, mutual fund vs. exchange-traded fund), investment category (for example, balanced fund or fixed income), share class, risk level and time horizon. Configuring the peer group will ensure that reasonably available alternatives of investment products are compared consistently across the firm. This framework not only adds a layer of consistency across the wealth enterprise, but also removes the ambiguity around how alternative investments can be compared.
Once a peer group has been configured, all its product peers are grouped and ranked across metrics such as investment costs, risk and rate of return.
The Peer Rating Algorithm
The purpose of the peer rating is to provide an intuitive depiction of how a product’s attributes compare against similar, or “peer,” products. The peer rating algorithm is updated on a nightly basis and is based on the weighted percentile ranking of each product’s respective evaluation measures (i.e., investment cost, risk and return), with each weighted equally within the overall rating.
When combined into a single data point, InvestorCOM’s peer rating provides firms and financial professionals with an efficient and consistent way to assess the relative strength (or quality) of a product and recommendation without bias.
In principle, products with a higher peer rating stack up well when compared to similar products in a peer group. This means higher-returning products with lower investment costs and risk metrics will have a higher peer rating.
InvestorCOM recognizes that wealth practices and investment products evolve over time. As a result, both the peer group and peer rating are entirely configurable by the firm, allowing firms to make changes and improve their analysis over time.
Value to End Users
- Access a best interest product shelf. Advisors can be confident that the products they recommend to clients have been assessed and approved for sale by the firm.
- Simplify the investment comparison process. Instead of filtering through tens of thousands of products on the dealer’s shelf, advisors can quickly find and compare products against their peer group – natural groupings of comparable products based on security type.
- Make faster, more intelligent investment recommendations. Advisors can see how their investment recommendation stacks up to its peers based on cost, risk and return. Advisors can use this information to identify which product to recommend, without diminishing the importance of the advisor’s skills and abilities.
- Create a consistent and repeatable process across the entire firm. The peer framework is a proven approach to overcoming ambiguity and personal judgment when making investment recommendations and assessing your product shelf.
- Be prepared in the event of an examination. Provide regulators with evidence of a consistent, repeatable process that can be scaled across your entire firm.
- Monitor and supervise advisor activity. View advisor recommendation activity across the firm, monitor for trends and identify compliance gaps.
- Evaluate the competitiveness of your product offerings. See how your products stack up against their peers in terms of cost, risk and performance, and objectively decide which products to keep on the shelf and which to remove.
To learn more about InvestorCOM’s peer rating analytic and to see how it works, we invite you to sign up for a demo of InvestorCOM’s compliance platform.