By Lisa Gok, chief legal officer, Cetera Financial Group
Maintaining compliance has become increasingly challenging for financial advisers as regulations have evolved and will continue to do so into the coming year. Over the last three decades, I have been immersed in the compliance world, including serving as an assistant regional director with the U.S. Securities and Exchange Commission for 11 years. Based on this experience, I believe that financial advisers will need to increasingly focus on compliance changes as they occur in order to respond to a more dynamic regulatory environment.
Advisers are already facing unprecedented scrutiny, resulting in significant fines and potential damage to reputations. With further changes likely coming due to the election, here are the three challenges that financial advisers can anticipate, with suggestions on how to navigate them.
Continuing Uncertainty About Regulatory Initiatives
Many firms have not acknowledged fiduciary status in connection with the Department of Labor’s Retirement Security Rule, or the DOL rule. Initiated this past September, the new, stricter federal rule was designed to fill regulatory gaps that protect retirement investors from recommendations that are not in their best interest. To date, however, there is a lack of clarity about whether the DOL rule will be implemented. If it is, it will require considerable effort for individual advisers to meet the new requirements. Advisers must stay on top of these developments, prepare for changes as they arise, and familiarize their staff with adjustments that may need to be made.
Based on the election results, regulations could transition from federal to state oversight, which would make it even more difficult for financial advisers to maintain compliance. Regulation Best Interest, or Reg BI, will require financial advisers to document everything, adding to the standards that these professionals will have to meet. This will specifically be a challenge for individual advisers who document everything by hand and will also make channels of communication between client and adviser more closely regulated and monitored.
Compromised Data Privacy and Security
Large-scale data security breaches have become a regular occurrence with more than 3,200 data breaches reported in the United States in 2023 – a 78% increase from 2022. This number will continue to rise as fraudsters become savvier, making it more difficult for financial advisers to fully protect client information. In response, the SEC unanimously approved amendments to Regulation S-P, which imposes new rules relating to cybersecurity breaches involving investment advisers and brokers.
Financial advisers need to encourage their clients to take proper security precautions in order to ensure their sensitive information is safe from both sides. Investing in high-quality security measures and staying on top of potential data security threats will be essential to protect clients and their information.
Identifying and Managing Conflicts of Interest
Firms and advisers will need to be more aware of conflicts of interest, particularly those that arise out of compensation practices. Reg BI heightens the requirements to identify and manage conflicts, especially in situations where the adviser offers other financial services, such as sales of insurance products and investment advisory services, as outside business activities. Advisers may have to make their own judgements about management of those conflicts without the involvement of their broker-dealer.
The Bottom Line
The past 20 years have produced good markets and bad, but the march toward stricter and more comprehensive regulation of investment advice has been a constant. Shifting demographics and the decline of defined-benefit pension plans will make it more imperative than ever for individuals to fund their own retirement, and high-quality financial advice will be a key part of that. Advisers should assume that regulatory agencies will increase the pressure to produce good outcomes for clients, whatever form that may take.
Compliance issues are likely to be subject to change, especially given the change of presidential administration in January 2025. These uncertainties are prolonging the lack of clarity that fiduciary advisers already face. All that we know for sure is that there will be regulatory changes in the coming year. And for that reason, it is essential that financial advisers stay informed and up to date in order to remain fully compliant within a rapidly evolving regulatory landscape.
Lisa Gok is the chief legal officer at Cetera Financial Group, where she serves as executive legal adviser to Cetera and its board of directors. In this role, Gok is responsible for ensuring a holistic legal view for Cetera, ensuring best practices while operating as a strong strategic partner for Cetera on a broad range of legal, operational, and corporate activities. Prior to joining Cetera in 2012, Gok held a variety of leadership positions both in and outside of financial services, including 15 years with the U.S. Securities and Exchange Commission.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.
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