InvestorCOM’s Peer Rating metric was developed to simplify the process of comparing Reasonably Available Alternatives (RAA) for investment product selection, supporting the SEC’s Reg BI Care Obligation and the Client Focused Reforms in Canada. Peer Ratings are an integral feature within the PeerCompareTM and ShelfAnalyzerTM compliance applications.

Regulatory Expectations

Regulators expect financial professionals to consider at least 3 key metrics when assessing Reasonably Available Alternatives: Cost, Risk, and Return. The challenge when comparing investment products across these 3 dimensions is weighing each dimension appropriately. One product may have lower cost but higher risk and returns – is that product better than a higher-cost product with lower risk and returns? Regulators are clear that they do not expect financial professionals to recommend the lowest-cost product or highest-returning product; rather, they expect this RAA analysis to be completed and documented for every investment recommendation.

Simplicity for Advisors

Any multi-dimensional analysis is challenging, even when using a spreadsheet! Peer Ratings solve this problem by doing 2 things: identifying the Peer Group for the investment product being recommended and then collapsing the 3 dimensions of Cost, Risk, and Return into one number between 1 and 10, where 10 is the highest rating and 1 is the lowest rating.

Peer Groups are determined by looking at a firm’s product shelf and then selecting all investment products that have common characteristics – for mutual funds, these are security type, asset class, category, and share class. For variable annuities, other characteristics, including rider types and surrender periods, are included. The Peer Group definition ensures that all “Reasonably Available Alternatives” are considered when doing this regulatory analysis.

Once the Peer Group is established, Peer Ratings are calculated by comparing each security within the Peer Group on the 3 dimensions of Cost, Risk, and Return. The securities within the Peer Group are then assigned a Peer Rating number based on relative performance across the 3 dimensions.

Simplicity for Compliance

The Peer Rating metric simplifies the end-to-end product recommendation and compliance process. Every pre-trade recommendation is digitally captured, and the Peer Rating metric can be used as a compliance gating number for approval of the recommendation. Firms can use a “green, yellow, red” category where green denotes an approved transaction based on a Peer Rating of perhaps 6-10. A red transaction could be a very low Peer Rating, such as 1-3, that requires compliance approval before investor recommendation. Every aspect of the Peer Rating process is configurable at the dealer level.