Big wirehouses have been buckling down on Reg BI (Best Interests) for years, adding to the already seemingly high compliance and operations oversight advisors experience. Advisors speak about the positive aspects of business at big firms, rather what you’d expect: loyalty to a firm an advisor has been with for years, a team, the clients, and the investment options. The negative aspects are also what you probably imagine: heavy handed compliance and operations as stated, frequent grid changes, new culture being forced on veteran advisors, lack of privacy, firm mandates, incentives to sell “sticky” firm products, and moving towards private banking models over wealth management to name a few.
What’s somewhat new is the amount advisors are airing concerns that they can’t do right by their clients at their current firm. To say this is personal to many advisors is an understatement, advisors have worked tirelessly to find and cultivate clients’ trust, and advisors rightly fear any move that could jeopardize their hard-earned trust. Along comes the big wirehouse that doesn’t care about clients the way advisors do, the firm cares about shareholders and the bottom line, even if certain tactics could hurt the very customer base that yields tremendous firm revenue. Firms have encouraged advisors to sell deposits, credit cards, loans, insurance, and a holy host or products and services that may very well not be in the clients’ best interest tracked to their goals set forth in a financial plan that you, the advisor, are responsible for.
An example of firm-advisor-client conflict is one in which an advisor represents a client that has a million dollars in cash. The client’s best interest would be served by holding $250,000 as FDIC insured at the parent bank at the big wirehouse, and spreading out the remaining $750,000 in three segments of $250,000 each to other banks to assure the entire one million had proper FDIC coverage. The case for this was important prior to the bank failures we’ve witnessed in 2023, and now even moreso. What does a big wirehouse want as advisors state? The entire one million at the bank despite improper FDIC coverage, which technically is a Reg BI violation right there.
The Securities Exchange Act of 1934 outlined the importance of transparency in the financial services industry, defining what it is to be a fiduciary. On June 30, 2020, Reg BI (Best Interests) made specific distinctions about transparency and disclosure for broker/dealers and advisors to always act in the best interests of clients, not the firm and its shareholders, at all times. It also clarified form CRS delivery details for clients. Overly simplified, there must always be full and fair disclosure of all material facts including fees and costs and any limitations on any investment. Reasonable diligence and care must be used in accordance with a client’s risk profile for the reward and cost, and it must not be excessive.
A perceived conflict of interest as noted could be what a firm wants its advisors to sell to clients versus what is best for each client. Note, the code specifically states, to “Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.” How does that work exactly when a firm is coercing advisors to do things that aren’t in the best interests of the client as in the banking deposit example?
In recent years, firms such as Wells Fargo and Merrill Lynch have been fined for account openings linked to credit cards, deposits, and cash business accounts – Reg BI was clearly in place, as well as the Securities Exchange Act of 1934. The current administration has backed up the SEC and FINRA by saying it will literally come after advisors, note not the firm, for wrongdoing. We see this in case files as well. Do you trust your firm to have your back if you were only following what they said versus Reg BI, the industry standard? The administration is also clearly shaking a stick at rollover IRA’s and any remaining commissions associated with them versus fee based to protect clients.
We know that advisors want to do best by their clients first and foremost for ethical reasons similar to a financial Hippocratic Oath they feel beholden to as a top professional. But beyond that, now the consequences for failing to do so can result in heavy fines, loss of practicing rights, and even jail. It is concerning that firms incent this conduct which is contrary to the Securities Act and Reg BI with an administration hell bent on holding up the letter of the law in this area.
The only option for advisors to consider if they don’t want a firm pressuring them towards certain products or services is to go independent, become the house. This doesn’t mean escape best practices, it means make sure they are happening in the way that is best suited to your clients, not the firm’s bottom line or shareholders. It is a stark reality that now the only way to truly ensure you’ve done absolutely right by your clients is through independence. The cost of not doing so is high – fines, practice rights, and jail. Is that a risk advisors are willing to take for the comfort and loyalty of the firm they’ve been with for years and years? More and more, as over 50% of advisors leave to go independent, the decision is clearly not. The client comes first and in that, so does the advisor.