Compliance December 21, 2018

SEC Regulation Best Interest Called a 2019 Priority by Chair Clayton

For retirement industry fiduciary advisers, the SEC’s introduction in April of a proposed Regulation Best Interest was one of the seminal moments of 2018; the regulation will likely take final form some time in 2019.

Reported by

During a recent speech, Securities and Exchange Commission (SEC) Char Jay Clayton said the market regulator is aiming to finish work on its Regulation Best Interest proposal during 2019.

For retirement industry fiduciary advisers, the SEC’s introduction in April of a proposed Regulation Best Interest was one of the seminal moments of 2018. Coming fairly soon after the defeat of the Department of Labor’s fiduciary rulemaking process in appellate court, the SEC’s new rulemaking effort quickly took center stage in many advisers’ minds when it comes to important regulatory changes on the horizon.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“These proposals, individually and collectively, are designed to enhance retail investor protection and decisionmaking by elevating the broker/dealer standard of conduct and reaffirming—and in some cases clarifying—the fiduciary standard for investment advisers, as well as requiring more candid and plain language disclosures,” Clayton said. “Using plain language, we are bringing the regulation of conduct and communications in line with the reasonable expectations of our Main Street investors.”

Clayton said the proposed rules seek to accomplish three things. First is requiring broker/dealers to act in the best interest of their retail customers by expressly requiring that the investment professional not place her or his interests ahead of the interests of the client; next is reaffirming, and in some cases clarifying, the fiduciary duty owed by investment advisers to their clients; and last is requiring both broker/dealers and investment advisers to state clearly key facts about their relationship, including their financial incentives.

“Importantly, the proposed rules are designed to preserve retail investor access—in terms of choice and cost—to a variety of types of investment services and investment products, while giving investors the tools to select the type of relationship that is appropriate for their needs and in line with their expectations,” Clayton said.

In the recent speech, Clayton referred to SEC’s ongoing work on this topic as “very important and long overdue.” He said comment letters written to SEC about this and other proposals show many individual investors do not have a firm grasp of the important differences between broker/dealers and investment advisers.

“They don’t understand the differences in the variety of services that they offer, how investors pay for those services, and the regulatory frameworks that govern their relationship,” Clayton said. “This is a complex set of issues, no doubt, but we must also recognize that access to investment advice is increasingly important to our society. And we must recognize that while the current framework needs improvement, it is extensive and in many areas functions well for our Main Street investors, particularly as compared to other jurisdictions.”

Clayton emphasized that, in terms of SEC’s 2019 agenda, completing the rules relating to the standards of conduct for financial professionals is “a key priority.”

“Since the April 2018 proposal, we have engaged with Main Street investors across the United States to discuss their experiences. SEC staff organized a series of seven roundtables around the country, providing Main Street investors an opportunity to speak directly with me, my fellow Commissioners and senior SEC staff—all in an effort to improve the proposed rules,” Clayton said. “It is clear, based on these discussions, that we have the right perspective, namely, that the core obligations of investment professionals—and mandatory plain language disclosures—should match reasonable investor expectations.”

Clayton adds that SEC staff received more than 6,000 comment letters on this subject, and is currently engaging with the comments to develop final recommendations.

In Practice December 21, 2018

Increased Client Trust Pays Unexpected Dividends

Data from Cerulli Associates shows advisory practices are migrating away from measuring their value based on their investment expertise.

Reported by

Cerulli Associates’ new report, “U.S. Advisor Metrics 2018: Reinventing the Client Experience,” strives to provide readers with a more granular understanding of the “intangible upsides of providing an exceptional client experience.”

According to Cerulli researchers, one big benefit of spending more time and attention on managing client perceptions is a strong increase in reported trust in the adviser by the client.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“A great client experience also manifests measurable advantages for the adviser’s practice, including a higher median client size, lower attrition rates, and the ability to move upmarket,” the report says.

The Cerulli research finds that practices that focus on the client experience have a 93% higher median client size compared to the industry average of more than $500,000. In addition, client experience-centric practices have lower involuntary attrition.

“On average, 34% of advisers’ asset outflows are a result of clients passing away, moving to another financial adviser, or transferring assets to a direct/online provider,” the report says. “Among experience-centric firms, however, this type of involuntary attrition accounts for 24% of asset outflows.”

Marina Shtyrkov, research analyst at Cerulli, notes that 65% of financial advisers expect to experience fee compression in the next five years, and 42% attribute this pressure to the growth of digital advice competitors.

“In response to this competitive pressure and recognition of heightened investor fee awareness, practices are migrating away from measuring their value based on their investment expertise, which can more easily be commoditized,” Shtyrkov says. “Instead, they are beginning to think more holistically about the nonfinancial impact they can have on their clients.”

According to Cerulli, advisers can harness the power of their client experience to increase retention, reduce attrition, and generate a strong referral system.

“To do so though, advisers need to restructure their thinking—and their processes,” Shtyrkov recommends. “Of all advisers surveyed by Cerulli, only 30% strongly agree that their practice goes above and beyond to make clients feel special, and that it has a repeatable, consistent client experience.”

How are advisers reforming their practices to be more client centric? Cerulli suggests advisers are more broadly adopting a combination of technology-driven client segmentation, intergenerational engagement within a team-based model, client appreciation, and holistic perspective to deliver an enhanced client experience.

“For now, experience-centric practices are in the minority—but practices that adopt and invest in a client-centric mentality will likely cement their value proposition and engender lasting loyalty from clients,” Shtyrkov concludes.

Information about how to obtain Cerulli Associates research is available here.

«