Get ready for increased scrutiny of your compensation

The conflicts-related reforms come into force at the end of June. Pertinent conflicts MFDA firms and advisors will need to address include those related to third-party compensation and fee-based accounts.

To help avoid compensation conflicts, Daniel Kratochvil, chief compliance officer with Agora, said advisors should include products with lower levels of third-party compensation — or none at all — in their evaluation processes.

Product evaluation should be “free from bias toward securities that offer different levels of compensation,” Kratochvil said. “This helps mitigate the conflict when it comes time to offering a particular product to a client.”

He also noted challenges with the push to fee-based accounts as deferred sales charges are largely banned and fees are unbundled.

Registrants must evaluate whether a fee-based account is in a client’s best interest, Kratochvil said. Not only must they have controls in place to do so, but they must provide evidence of the evaluation.

For dealers, that means having appropriate policies and procedures; for advisors, it means taking “robust” notes when deciding to move a client to fee-based, he said.

Kratochvil also addressed disclosure and conflicts. “Timing is of the essence,” he said, because regulators expect clients to use disclosure when making decisions about a firm or investment performance. Disclosure should thus be done at account opening, or at least before a trade, he said.

Disclosure also isn’t necessarily one and done, Kratochvil said.

“Clients can’t be expected to recall previously disclosed conflicts if they were [disclosed] months or years in the past,” Kratochvil said. As such, re-disclosure will be part of firms’ policies and procedures, and should be part of advisors’ client conversations and notes, he said.

While implementing the reforms will be a lot of work, firms and advisors don’t have to be perfect, but must demonstrate a culture of compliance and documentation, he said.

The session also served as a call to action for dealers and advisors who don’t want to become the next Blockbuster.

“We’re in a time of unstoppable change,” said Paul Morford, co-founder and CEO of Agora Dealer Services Holding Corp. “If you do what you’ve always done, you will fail.”

To retain or even grow market share, Morford suggested the industry embrace tech, the CFRs and regulatory collaboration.

Further, he suggested the industry be “laser-focused” on advice, especially for mid- and mass-market clients — a large proportion of clients served by MFDA advisors.

Targeted use of tech could help democratize advice, avoiding a potential advice gap as the reforms are implemented, Morford said.

He suggested using tech to take low-value tasks off advisors’ to-do lists, improve back-office capabilities and deliver a client experience that matches client expectations.

Robert Smuk, president and CEO of Agora, questioned whether a consolidated self-regulatory organization would be advantageous for MFDA advisors’ clients.

“If MFDA members take the lead on client-first orientation, the unbundling of fees, lowering costs and finding ways to continue to provide advice, then we will remain relevant and become a moral force for the average investor,” Smuk said.