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 all areas of consideration, including their own compensation or incentives.
A Higher Standard of Care
Reg BI aims to enhance transparency and build upon the existing suitability standards by requiring 4 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, time horizon, liquidity needs, 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.
RegBI aims to protect retail investors by establishing a “best interest” standard of conduct for broker-dealers and their associated persons when making recommendations.
How Reg BI Has Reshaped the Advisor-Client Relationship
Since its implementation, Reg BI has driven noticeable shifts across the broker-dealer industry. Registered Representatives 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.
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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