The Financial Advisor’s Guide to Form CRS Compliance (and How Riskalyze Helps)

Change is a part of the financial advisor job description.

From major evolutions like zero-trade commissions and the uprooting of the entire financial services landscape due to COVID-19, to smaller, more routine market fluctuations, advisors increasingly need to be agile, informed, and armed with technology that helps them pivot with the relentless transformational challenges they face.

This is especially true when it comes to compliance.

In June 2020, amidst massive global disruption, the SEC introduced Regulation Best Interest, or Reg BI, designed to help retail investors better understand how to navigate their relationships with financial professionals by giving them the information they need to make the right choices for their circumstances.

Reg BI is the SEC’s answer to the Department of Labor’s Fiduciary Rule, which caused major controversy in 2018. As its name implies, Reg BI establishes a “best interest” standard of conduct for broker-dealers when making recommendations to their retail customers, meaning that the broker-dealer or associated representative needs to exclusively act on behalf of the customer.

Despite controversial opinions on Reg BI, the rule reflects a growing need to do what’s right for the end investor.

As our industry continues to shift toward a blanket fiduciary standard and away from the less stringent “suitability” standards of the past, Reg BI is surely a window into the future of financial services. Firms that do everything they can to comply will be far better suited to win in the long run.

Maintaining Compliance with Reg BI

The easiest way to understand how to meet Reg BI obligations is to examine the rule in four parts: Care, Conflicts of Interest, Compliance, and Disclosure.

Care

As we mentioned above, suitability is phasing out as the standard of care for financial professionals licensed to sell securities. While investment advisors have long been held to a fiduciary standard, the guidelines for broker-dealers were less exacting. Now, home offices and advisors must document the standard of care applied to portfolios and transactions before or at the point of sale.

The old way of assessing risk — stereotyping investors based on age and assigning subjective semantics like “moderately aggressive” — simply doesn’t cut it anymore.  Clients must fully understand the risks and costs associated with the recommendations they’ve received.

Conflicts of Interest

The dedicated Conflicts of Interest obligation spells out how brokers must operate in potential dealings with clients.

Brokers are obligated to eliminate sales contests, quotas, and bonuses dependent on the sale of a specific product, or on selling a type of security within a certain amount of time.

Under the Conflicts of Interest section of Reg BI, advisors must also:

• Identify and disclose—or eliminate—conflicts of interest associated with recommendations
• Identify and mitigate conflicts of interest from recommendations that incentivize anyone to put the firm’s interest ahead of an investor’s interests.
• Identify and disclose material limitations on securities or investment strategies that might be recommended, as well as any conflicts of interests associated with those limitations
• Prevent any limitations and conflicts of interest from causing anyone to make recommendations that place the interest of the firm ahead of the interest of the investor

Compliance

The compliance obligation is simple and straightforward. Broker-dealers are required to establish ongoing oversight for their firms by setting up policies and procedures covering record-keeping and liability, to ensure they meet the obligations set forth under Reg BI.

Access a short yet comprehensive checklist to ensure your firm is engaging with investors in a way that complies with Reg BI.

Disclosure

The disclosure obligation holds broker-dealers and RIAs accountable for providing, in writing, a full and fair disclosure of material facts that represent the scope of their relationship with investors—prior to or at the time of recommendation.

Disclosures must include:

• The capacity in which a Registered Representative acts
• Facts around any conflicts of interest
• A new Form CRS to educate potential investors about fees and the best interest standard

Form CRS

Included within the Disclosure obligation is perhaps one of the most attention-grabbing Reg BI requirements: Form CRS.

What Is Form CRS?

Broker-dealers and RIAs must provide a brief customer relationship summary to retail investors, called Form CRS. Within the summary, they must include:

• The types of services offered by the firm
• Any fees, costs or conflicts of interest associated with the firm’s services
• Any reportable legal or disciplinary history
• Where to find more information

The SEC has issued strict guidelines about how Form CRS is to be completed:

• Write in plain English and speak directly to the client (“you,” “us,” “our firm” language)
• Take into account the client’s level of financial experience, and avoid legal and technical jargon
• Use definitive words, not ambiguous language like “may,” “might,” or “could”
• Do not use vague or exaggerated statements, multiple negatives, or boilerplate language
• Do use graphics or prominent text features to convey additional information
• If necessary, link out to supplemental information

Brokers and advisors must also include the following disclosures pertaining to cost and standards of conduct:

Cost

“You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.”

Standards of Conduct

“When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.”

Conversation Starters

Finally, brokers and advisors are obligated to include seven conversation starters that help clients understand how to engage in a dialogue with financial professionals in order to ensure their needs will be met:

• Given my financial situation, should I choose an investment advisory service? Why or why not?
• How will you choose investments to recommend to me?
• What is your relevant experience, including your licenses, education, and other qualifications? What do these qualifications mean?
• Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go towards fees and costs, and how much will be invested for me?
• How might your conflicts of interest affect me, and how will you address them?
• As a financial professional, do you have any disciplinary history? For what type of conduct?
• Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?

The Form CRS Playbook

It’s important for firms to put a dedicated process in place in order to maintain compliance with Form CRS.

• Identify a person or team to own the disclosure updating process
• Inventory all disclosures already being used
• Create guidelines and a stylebook for disclosure updates, using existing disclosures as a starting point
• Pay special attention to the use of the words “may” and “potential conflict” in your existing and updated disclosures
• Review any current advertising that discusses “Best Interests” and evaluate its ongoing applicability
• Plan for lead times necessary as you draft updated disclosure language
• Draft your Form CRS
• Consider delivery requirements and how you will communicate your new disclosures to clients
• Review filing and record-keeping requirements to ensure your new disclosures will be in compliance with accessibility and storage needs
• Review agreements with your clients to make sure the scope of the advisory relationship is accurately defined

Meeting the Form CRS obligation might seem overwhelming, but Riskalyze has built solutions specifically to help financial professionals maintain compliance under the new Reg BI standards.

Leveraging Riskalyze to Meet Form CRS Compliance

Before Reg BI went into effect, Riskalyze introduced a suite of brand new features designed specifically to optimize meeting compliance requirements.

In particular, advisors and firm administrators using Riskalyze Select or Riskalyze Elite can now attach Form CRS to client-facing reports, ensuring that all client-facing materials satisfy the disclosure obligation. They can also add Form CRS into reports like Investment Policy Statements.

More recently, at the 2021 Riskalyze Fearless Investing Summit, Riskalyze introduced Command Center, a home-office platform that includes:

• An Alignment Dashboard to bring central visibility to risk objectives
• Compliance tools for sifting through a firm’s accounts to spot and correct issues
• Proposal oversight to visualize and document Regulation Best Interest (Reg BI) compliance on client and prospect-facing proposals
• User management capabilities for firms

Enterprises can configure Command Center to track Form CRS delivery and compliance, ensuring they meet the necessary Reg BI requirements.

Meeting Reg BI Obligations

Regulatory standards like Reg BI and its accompanying Form CRS requirement are here to stay. Financial advisors need to make smart decisions about the technology they use to help them stay compliant. Riskalyze’s solutions are built especially to help advisors maintain compliance effectively, comprehensively and with less headaches.

Ready to dive deeper? Feel free to explore our Reg BI solutions and even schedule some time with a technology specialist!