Contributor: Mark Gialo
Come July 2012, FINRA will be “raising the bar” on the fiduciary obligations financial advisors have relative to their clients. While prior rules (FINRA 405 & 2090) emphasized transaction suitability, FINRA 2111 suitability & 2090 know your customer rules focus on greater investor protection and advisor accountability. This puts the onus on financial advisors to use reasonable diligence and understand essential facts about their clients.
Broker dealers need to interpret and incorporate the new FINRA regulations into their technology solutions to ensure they are in compliance. What is the scope of this activity? What are the rules and enhancements necessary to fulfill the obligation set forth by FINRA?
The major broker dealer sub-systems that will be affected include client onboarding (account opening) systems, back-office account and securities processing platforms, and trade and portfolio surveillance solutions. Broker dealers need to consider expanding their technology solutions to include new data fields required to fully implement the new regulations. Whether relevant at the client and/or account level, these fields must capture:
- The investor’s liquidity needs. What is the dollar amount the client requires to have as liquid to pay for immediate expenses? This should include assets held away from the broker dealer, ensuring that a holistic picture of the individual is understood by the financial advisor. Surveillance enhancements will make sure that if the individual’s liquid assets fall below this tolerance level, the financial advisor receives an alert that a discussion with the client is needed.
- The investor’s liquidity time. What is the individual’s time horizon to hold the asset? In understanding the time horizon, the surveillance enhancements will alert compliance and the financial advisor if the assets are liquidated sooner than what the individual communicated. This will allow the financial advisor to discuss these variances with the client, and make the necessary adjustments to the individual’s information.
- Individual product investment experience. The regulations include capturing the client’s experience with different financial products such as equities, fixed income, options and mutual funds. Transactions that execute in the investor’s account showing minimal experience for the asset class can trigger alerts in the surveillance system. This can prompt a discussion with the financial advisor to ensure the investment is appropriate for the individual.
- The investor’s account needs. FINRA mandates that the purpose of the account – such as retirement or education savings — be quantified and captured. Understanding the account purpose will help to trigger alerts if the client invests in a security that may be more risky than the stated purpose of the account.
Other important considerations documented in Rule 2111 include capturing financial advisor recommendations (e.g. Hold, Buy or Liquidate), held away assets and the client’s investment decision maker.
Broker dealers who comply with the regulation and embrace the role as “fiduciary” will win the battle for individual investors. Are you taking steps to prepare for FINRA 2111? Have you committed resources to ensure that your firm is ready to support the new rule?