When the SEC introduced Regulation Best Interest (Reg BI) in 2020, it marked a significant shift in the standards governing financial advice. Designed to enhance investor protection, Reg BI raises the bar for broker-dealers, requiring them to act in their clients’ best interests when making investment recommendations.
Before Reg BI, broker-dealers operated under a “suitability” standard—meaning they only needed to recommend investments that were appropriate, not necessarily optimal. In contrast, Reg BI requires financial professionals to prioritize the investor’s best interests over their own compensation or incentives.
A Higher Standard of Care
Reg BI aims to create a more transparent and accountable financial advisory environment by focusing on four key obligations:
- Disclosure: Advisors must clearly outline fees, services, and potential conflicts of interest.
- Care: Recommendations must be well-researched, cost-conscious, and suitable for the client’s financial goals and risk tolerance.
- Conflict Mitigation: Firms must identify and take steps to reduce conflicts of interest that could influence investment advice.
- Compliance: Broker-dealers must establish and enforce policies to ensure adherence to these standards.
While Reg BI does not impose a full fiduciary standard like the one applied to Registered Investment Advisors (RIAs), it represents a meaningful step in closing the gap between commission-based brokers and fee-based fiduciary advisors.
How Reg BI Has Reshaped the Advisor-Client Relationship
Since its implementation, Reg BI has driven noticeable shifts across the wealth management industry. Advisors are under greater scrutiny, and firms have adjusted their business models in several key ways:
- Increased Transparency – Clients now receive clearer information on how their advisor is compensated and any potential biases in investment recommendations.
- More Thoughtful Investment Selection – Advisors must consider costs, risk, and long-term suitability when making recommendations, rather than focusing on commission-driven products.
- Shift Toward Fee-Based Advice – Many firms have transitioned away from commission-heavy structures in favor of fee-based or hybrid advisory models that align more closely with client interests.
For investors, these changes translate to stronger protections, better disclosure, and a more informed decision-making process. While Reg BI does not eliminate all conflicts of interest, it establishes a higher standard of care, ensuring that investment professionals act with greater accountability and integrity.
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