One of the key components of the Regulation Best Interest adopted by the SEC on June 30, 2020, is the Care Obligation. In referring to this obligation, the SEC states that when making a recommendation, a broker-dealer “must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer….”
This stipulation is broken down into three specific requirements. In short summary, the stipulations state that any recommendations should always be in the best interests of clients based on their investment profiles.
There are ten factors the SEC states the broker-dealer should consider when assessing a client’s investment profile. The Totum questionnaire meets nine of these objectives. (The tenth is not needed, as discussed toward the end of this article.)
Below is a list of the nine factors outlined by the SEC that are met through the Totum by TIFIN questionnaire:
Age: The client or advisor must input the client’s age.
Other Investments: The client or advisor must upload their current investment portfolio, if applicable.
Financial Situation and Needs: Questions about household income, number of dependents, expenses, and consistency of income help address this requirement.
Tax Status: The questionnaire doesn’t specifically ask the client about his or her tax status. But through our questions on financial situations and needs, as well as the client’s location, it is able to assess both federal and state income tax rates for each customer.
Investment Objectives: The questionnaire asks each client about his or her financial goals, which fulfills this requirement.
Investment Time Horizon: The client must also provide his or her desired investment time horizon. There are four choices: short term (less than three years); intermediate (less than ten years); long term (greater than ten years); or retirement age, which defaults to age sixty-seven if no age is entered.
Liquidity Needs: Our questionnaire comparison of household income and expenses, as well as consistency of income, addresses this requirement. It also asks about the health of the individuals in the investor’s household, which is a key factor of liquidity needs but is often absent in other questionnaires.
Risk Tolerance: Although Totum believes in relying more on facts over feelings, we do include a series of questions that help determine each individual’s personal risk tolerance.
Other Information In Connection With a Recommendation: The Totum platform provides questions that reveal an investor’s true ability to bear risk, which is another component often overlooked in comparable tools.
The only requirement not met is the “investment experience.” According to the requirements outlined by the SEC, this factor can be dismissed. They state:
“One or more factors may have more or less relevance, or may not be obtained or analyzed at all if the broker-dealer has a reasonable basis for determining that the factor is irrelevant to that particular best interest determination.”
Since Totum has determined that collecting information about investment experience does not add value when determining a client’s ability to bear risk, we felt it unnecessary to include this subjective question in our platform.
The Totum by TIFIN platform and our fact-based risk capacity scoring not only help advisors meet the Care Obligation of Reg BI but also helps advisory firms with compliance through time-stamped documentation.
To learn how Totum’s approach can help your firm, contact us today to schedule a demo.
Schedule a time to see how Totum’s fact-based risk capacity can help your firm with Reg BI