The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
Regulation Best Interest, or Reg BI, is a series of rules from the Securities and Exchange Commission (SEC) that govern how broker-dealers and financial advisors must treat their customers. Specifically, it says that these entities must act in the best interests of their client — which sounds clear enough — though the actual standard of conduct may often be muddy.
Here are the key components of Reg BI and what they require of those giving financial advice.
The key elements of Regulation Best Interest
The SEC adopted Reg BI in June 2019, and the rule created a new standard of conduct for broker-dealers and their agents in how they deal with retail customers. Specifically, this standard applies when recommending any securities or investment strategy using securities, including account recommendations, to retail customers for personal, family, or household use.
The general obligation says: “When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer’s interests.”
To meet this overall obligation, broker-dealers must meet the following obligations:
- Disclosure obligation: Customers must receive in writing a full disclosure of all material facts about an investment, including fees, any conflicts of interest and the broker’s scope and capacity in making the recommendation, among other details.
- Care obligation: This standard charges the broker-dealer to “exercise reasonable diligence, care, and skill in making the recommendation,” meaning that customers must receive recommendations that factor in cost, client needs and alternative investments.
- Conflict-of-interest obligation: This duty requires broker-dealers to enforce policies that mitigate or eliminate conflicts of interest between them and clients.
- Compliance obligation: This obligation requires broker-dealers to enforce policies that help them comply with Regulation BI.
Broker-dealers may provide some disclosure information on Form CRS, which includes details on services offered by the firm, their costs and other significant fees.
Key concerns with Reg BI
Some broker-dealers, financial advisors and investors have expressed concerns over Reg BI, particularly over the care obligation and what it requires of the service provider and what clients can expect. Some have called the care obligation “suitability plus,” suggesting that it requires more of the broker than the suitability standard, under which customers must be offered “suitable” recommendations. Neither standard is as stringent as the fiduciary standard, which requires an advisor or agent to operate in the client’s best interest at all times.
For many, the problem with Reg BI lies in the fact that brokers may have different standards from investment advisors, who typically must operate according to a fiduciary standard. Critics say that Reg BI does not impose a fiduciary standard on many brokers even though they may make investment recommendations, leaving clients open to abuse and deception. Yet, the broker’s written documentation may plainly say that it’s not acting under a fiduciary standard, in compliance with the law. So clients may be left to determine what kind of advice they’re getting.
Additionally, with the emergence of artificial intelligence (AI), the SEC proposed significant changes in July 2023 to how firms deal with conflicts of interest and communicate with clients.
How Reg BI affects clients
Reg BI is intended to clarify the duties and responsibilities of broker-dealers and advisors to their clients, puts in place minimum standards of conduct and charges firms to maintain processes that minimize conflicts of interest between the firm and its clients.
To this end, broker-dealers are required to provide written communication that details the broker’s scope and capacity, and if it’s working as a fiduciary or otherwise. Service providers must disclose all material information about an investment and any conflicts of interest. This info may be communicated on Form CRS and other written forms for individual investments.
For clients, it means these documents are the touchstone for how the service provider will deal with you and on what basis. In particular, these disclosures should clarify if the firm is working for you as a fiduciary, which is an important standard for those seeking advice. It also clarifies how the service provider is paid, whether through fees or a commission on products sold to clients. You’ll want to ask these types of questions before you enter into any business relationship.
Understanding the firm’s incentive and compensation system is one of the most important things if you want to understand the type of advice you will receive. If the firm receives only fees from clients, then it’s better structured to provide you with the best advice and avoid conflicts of interest.
Those looking for a financial advisor should look for an advisor with these key qualities.
The SEC adopted Regulation Best Interest to protect investors from unscrupulous practices of broker-dealers and others that may oversee and offer advice on their finances. But some lack of clarity in the rules may leave customers uncertain whether they’re getting the best advice.
If you’re on the hunt for a financial advisor, Bankrate’s AdvisorMatch can connect you to a CFP professional.