Reg BI vs Fiduciary Duty: What Changes When an Advisor Moves

The short answer: Regulation Best Interest, required since June 30, 2020, requires a broker-dealer to act in a retail customer's best interest at the time it makes a recommendation, without putting its own interests ahead, and it applies recommendation by recommendation. An investment adviser's fiduciary duty, a duty of care and a duty of loyalty, applies to the entire relationship with the client. A dually registered advisor works under both, depending on the account; an advisor who moves to an independent RIA and gives up the broker-dealer registration works under the fiduciary duty alone for their securities business.

Reg BI vs fiduciary duty at a glance

What Reg BI requires

The SEC adopted Regulation Best Interest on June 5, 2019. It took effect September 10, 2019, and broker-dealers had to comply by June 30, 2020. It requires a broker-dealer, when it recommends a securities transaction or investment strategy to a retail customer, to act in that customer's best interest at the time of the recommendation, without placing the broker-dealer's financial or other interests ahead of the customer's.

The rule is built on four component obligations: a disclosure obligation, a care obligation, a conflict of interest obligation and a compliance obligation. The SEC described it as raising the broker-dealer standard of conduct beyond the suitability obligations that applied before.

What the fiduciary duty requires

An investment adviser is a fiduciary under federal law. In its 2019 interpretation, the SEC described that fiduciary duty as comprising a duty of care and a duty of loyalty, and said it applies to the entire relationship between the adviser and its client. It is principles-based and follows the shape of the relationship the adviser and client agree on.

Two standards, one advisor: dual registration

Nearly all wirehouse advisors, and many at regional firms and independent broker-dealers, are registered both as registered representatives and as investment adviser representatives. For them, the standard follows the account: brokerage recommendations fall under Reg BI, including a recommendation of one type of account over another, and advisory accounts fall under the fiduciary duty. These federal standards are the floor: state securities rules, the Department of Labor's rules for retirement-account advice and, for CFP professionals, the CFP Board's standards can add to them. What is a dually registered advisor explains how the two registrations work side by side, and what is a hybrid RIA covers the independent version.

What changes when an advisor moves

• Wirehouse to independent broker-dealer. The advisor usually stays dually registered, so both standards continue, account by account.
• To a hybrid RIA. Advisory business moves to the advisor's own RIA under the fiduciary duty, and the broker-dealer registration, with Reg BI, stays for commission business.
• To an independent RIA with no broker-dealer. Once the broker-dealer registration ends, every securities account the advisor manages sits under the fiduciary duty; any fixed insurance sold under an insurance license follows state insurance rules. Lapsing your Series 7 when you go RIA covers what ending that registration involves.

The wider differences between the two independent channels, from supervision to payouts, are in IBD vs RIA: what changes for a financial advisor, and how the move affects the way an advisor can describe their compensation is in fee-only vs fee-based.

Which structure fits a practice

The standard of care follows the structure, and the structure follows the book: how much of the business is brokerage, how clients are served, and what the advisor wants the firm to look like in ten years. That read starts with a confidential conversation. Request an Introduction.