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How SEC's Regulation Best Interest impacts wealth technology – Financial Planning

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Not “best.” Not even close.

As Wall Street applauds the passage of the Regulation Best Interest standard, chiefs of a number of digital financial services firms are voicing concerns about the stringency of the SEC standard and the impact it may have on the future of wealth management technology.

They say the rule, which passed by a margin of three to one last week and will soon dictate how advisory firms offer investment services and, in turn, how wealthtech firms build out new technologies, seems to have fallen well short of its goals of increased transparency and protection for individual investors and greater, cheaper access to investment advice.

“Unfortunately, this misleadingly titled rule may best serve the marketing interests of large financial corporations to the detriment of individual investors,” said Betterment CEO Jon Stein, in an email. “It is a gift of sheep’s clothing to the wolves of Wall Street.”

The head of the industry’s leading robo advisor by assets — Betterment manages some $14 billion — warned the American consumer not to mistake regulatory action for progress, adding the rule will likely harm end investors.

Others agreed.

“Ideally, everyone in the financial services industry needs to be looking at how we can improve our reputation,” said Eric Clarke, CEO of technology provider Orion Advisor Services, in an email. “Regulation Best Interest doesn’t seem to clearly define what is meant by ‘best interest.’ It certainly does not bring brokers to a fiduciary standard.”

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Aaron Klein, CEO of Riskalyze, called for a higher level of transparency, whether the advisor is selling an investment product or a fiduciary standard of investment advice. “It should not take thousands of pages of rules to get that concept across,” Klein said in an email.

But while regulators could have done a better job creating clarity around a suitability standard, the creators of automed investing platforms and other wealthtech will play an increasingly large role in delineating that distinction, says Anders Jones, CEO of Baltimore-based RIA, Facet Wealth.

“The challenge for the RIA industry is to make fiduciary quality advice affordable and accessible to the general investing public,” Jones says. “This must be done, because of the potential for states to enact their own legislation, which will only create further inequality and confusion among consumers.”

Forty-five percent of Americans think robo advisors will have the greatest impact on financial services as opposed to other forms of technology, including cryptocurrency, blockchain and AI. Nearly 60% of Americans expect to use a robo advisor by 2025, according to research by Charles Schwab.

Disappointed by regulatory action at the federal level, industry professionals will likely call for increased action at the state level, according to many experts. That outcome could result in a regulatory patchwork with some brokers held to a fiduciary standard and others, not.

Nevada and New Jersey, for example, have moved forward with such regulations, provoking backlash from pro-SEC rule heavyweight Wall Street incumbents. Morgan Stanley and other brokerages have threatened to pull business from Nevada. New Jersey is currently accepting feedback on its proposal.

One unforeseen outcome of new litigation could be an increased demand for wealthtech, especially from firms that provide compliance technology to RIAs.

“Firms will start to do all they can to ‘suit-proof’ themselves going forward,” says Will Trout, a senior analyst at Celent. “The focus will be on showing that the advisor has taken into account all relevant factors in providing ‘advice.’ Here again, definitions can be broad, but it seems that aggregation tech and financial planning platforms will be the short-term winners.”

While regtech has been a hotly watched sector of wealth management in recent years, compliance technology has taken a back seat since the DOL best interest standard was struck down last year, says Adam Holt, CEO of onboarding software firm Asset-Map. With the SEC finally landing on a new standard, compliance conversations are again likely to bubble up to the top of many firms’ strategy discussions.

This applies to large enterprises that have been focusing on rebuilding or upgrading legacy systems, says Holt. The regulation is going to move compliance back to their front burners, and may slow the momentum a lot of firms have achieved in reviving their tech tools, reprioritizing their regtech goals.

In fact, 64% of all firms surveyed in Financial Planning’s 2019 Tech Survey said they already use compliance software. Regtech was the sixth most-used technology, coming in only behind CRM, financial planning, client portals and portfolio and document management systems.

“As with most regulation, proof will be in the pudding,” Trout says. “How much wiggle room will Reg BI allow? It seems clear that dually registered reps will be able to call themselves whatever they choose. Most likely, matters will be settled in the courts.”

Tech providers, including RIAs and wealth management firms, will ultimately be responsible for automating best practices spelled out in the regulation anywhere from servicing the end investor to custodian care, says Mark Tapling, CEO of workflow automation firm Docupace. Those lines may provide opportunities for differentiation.

“I would hope that tech companies ensure to include all of the appropriate disclaimers, but in the end, their products won’t sell if they don’t carry their share of the responsibility,” Tapling says. “On the upside, those providers that do facilitate best practices in compliance will establish a competitive advantage.”

Others disagree about the need for differentiation. “Great advisors know their value and don’t resort to promoting regulation as a strategy for helping themselves or hurting their competitors,” says Klein. “Second, what we really need in this profession is transparency.”

As a handful of state and federal regulators consider varying standards, RIAs may be able to use cost effective strategies not based on commissions to provide quality advice and emerge as the real winners of the SEC suitability standard that many independents advisors have called toothless.

“As a result, RIAs continue to have a competitive advantage,” says Clarke. “They are able to give a simple, straight answer to their clients when asked: ‘Are you acting as a fiduciary?’ ”

Sean Allocca

Sean Allocca is an associate editor of Financial Planning, On Wall Street and Bank Investment Consultant. Follow him on Twitter at @sjallocca.

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