Reg BI and Fiduciary Obligations

Taking Standards of Care from Policy to Practice

In Part 2 of this Oyster Stew conversation, Ed Wegener continues the discussion with compliance experts Brent Nicks and Len Derus—this time focusing on the most pressing challenges firms face in applying Reg BI and fiduciary duty in practice: documentation, compensation conflicts, and rollover recommendations.

The episode explores how firms can move beyond the “policies on paper” approach to build consistent, defensible documentation and supervisory practices. It also dives into how regulators are scrutinizing compensation structures and rollover recommendations under PTE 2020-02, and what compliance teams can do now to prepare.

What You’ll Learn in Part 2

• Documentation Expectations: When to document recommendations—and when not to—including product complexity, costs, and client-specific factors.
• Supervisory Oversight: Why cookie-cutter rationales can create risk and how firms can monitor for consistency across reps.
• Compensation Conflicts: Practical strategies for mitigating compensation-driven incentives and leveling payouts to reduce bias.
• Rollover Recommendations under PTE 2020-02: How to document IRA rollovers, justify added costs, and align practices with both Reg BI and fiduciary standards.
• Technology vs. Forms: The pros and cons of manual versus technology-driven documentation processes—and how to strike the right balance.
• Training and Monitoring: How tailored training and compliance monitoring help ensure reps are following procedures and avoiding systemic risks.

Roadmap for Compliance

Regulators are no longer satisfied with high-level assurances of compliance. From rollover rationales to compensation oversight, firms must be able to prove—through documentation, training, and monitoring—that recommendations truly meet the best interest of the client. This episode offers a roadmap for moving beyond minimum compliance and building practices that withstand examiner scrutiny.

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The Reg BI Support You Need

Oyster Consulting partners with broker-dealers, investment advisors, and dual registrants to assess and improve compliance programs around Reg BI, fiduciary obligations, rollover documentation, and supervisory procedures. Our consultants bring hands-on experience from FINRA, the SEC, and leading financial institutions. Whether you’re designing documentation workflows, implementing compensation oversight, or training your team, Oyster provides practical solutions to help your firm stay ahead of regulatory expectations.

The Oyster Solutions Advantage

The Oyster Solutions platform makes documentation and oversight easier, smarter, and more consistent. The Fund Analyzer module leverages Morningstar data to compare costs, returns, and account types—helping advisors demonstrate best interest when making recommendations or evaluating rollovers. Built-in workflows and pre-trade tools give compliance teams confidence that recommendations are documented, monitored, and defensible in the eyes of regulators.

Transcript

Libby Hall: Welcome to the Oyster Stew Podcast. I’m Libby Hall, and today we’re continuing our two-part discussion on Reg BI and fiduciary obligations. In Part 1, we explored the evolving regulatory landscape and the core differences and overlaps between the two standards of care.

In Part 2, we’ll dig deeper into the practical side—how firms can approach documentation, manage compensation conflicts, and handle rollover recommendations.

Let’s dive in.

Ed Wegener:  You mentioned something that I think is a real big consideration, and that’s the documentation aspect of this. The SEC, when they wrote Reg BI, said that you don’t have to document the basis for every recommendation. They gave some examples of things to consider, like the complexity of the products, the risks, et cetera. But they leave flexibility for firms to make that determination about what to document. But that flexibility also comes with some uncertainty about, well, what should we document, what shouldn’t we? And then how do you train your advisors to make sure they’re making good decisions with respect to that? So, when you think about documentation, what should firms be considering about? When to document and when not?

Brent Nicks:  Well, I will just speak from the advisory side, where very often the trading is being done on a long-term strategic goal or under a model plan where the individual transactions themselves are being evaluated in line with the strategy, not so much on the individual transaction itself. So, your documentation efforts to make sure that you’re meeting your fiduciary standard would be more to the portfolio performance, to the strategy deployed versus the client’s objectives and goals. Evaluating for changes in beta and alpha and R squared versus and what drift I mean it’s getting a little bit into the weeds but managing to the long-term objective for the strategy and making sure that you’re keeping it between the white lines. Am I doing what the clients ask me to do over the long-term and then balancing that with? Is the way that I’ve done this for this client the most cost-effective way? From a fiduciary standpoint, yes, you have the long-term goals and objectives, but you still need to be looking at your fees and the expenses that you’re incurring to perform those functions and make sure that the manner that you’re doing it is the most cost-effective and you’re documenting.

To that aspect as well, and particularly for RIAs, is the requirement to have at least that annual touchpoint documented, kind of a soup to nuts review of the entire relationship. And so that covers, I would say, in some respects, at least a point in time, at least once a year, where we’ve gone over the entire relationship and the entirety and we’ve kind of level set with that client. And if we haven’t, then we’ve adjusted the strategy, we’ve adjusted the models and we’ve documented to the new direction or potentially the tweak that based on our conversations with the client and off we’re going again. So, I say all that is an important distinction, not as concerned with the individual transactions themselves, but in the strategic goal overall and how those trades are meeting that objective. Len, what do you think?

Len Derus:  Well, on the broker-dealer side, a lot of firms are out there trying to document every transaction, if possible, but I’m going to break this down into a couple of areas. Certainly, a new customer – you are documenting everything, everything you know about the customer. You’re going to document here’s why this product makes sense for them and here’s why we’re going to put them in this one family. New customers absolutely, you’re going to have the documentation. You need it. The supervisor needs it because they have to make sure that you’ve understood the product. You understood the customer.

Now it gets a little bit more difficult as you move on from there. If you’re more active with a customer in terms of more stock transactions, how should you document that? Do you need to document every transaction or not? You may not need to. However, over time, you’re going to certainly need to revisit information to make sure. Whatever you’re doing, you’re adding stocks. You keep adding new stocks. You’re selling out that whatever you’re doing is making sense for that customer, how they are at that time of that recommendation. So, in six months, a lot can change in six months, right? The markets change, someone’s employment can change, anything can change over time. There is a necessity, when you’re making a recommendation, to ensure that the information is up to date. It would be good to keep some notes on that. I spoke to them. We opened the account three months ago, spoke to them again, we made another recommendation. Everything is still in the same situation. This is still a good investment. Here’s why that’s great.

Every transaction, every single one? Maybe not, although the SEC has said well, how can you show this is in the best interest if you don’t have notes, right?

So that’s kind of the gray, murky area and some of that’s going to come down to in terms of how the regulator is going to look at it is what’s really happening with the customer. Who’s benefiting the most? Who’s getting the most out of the relationship between the broker draft and the customer? So, keep in mind, on the documentation for new customers, absolutely, as you build that relationship, there is going to come time where you have to make sure that everything that’s happening with that customer is still up to date. Maybe it’s improved, maybe situations change in a more difficult way. You have to understand that before you put that transaction through.

I did want to go back a little bit, though, when we were talking about reasonable basis, because this is what’s so important, especially when you’re making recommendations, and if there’s a prospectus involved, you should know what’s in there.

You don’t have to memorize every prospectus, but you should really know or understand what’s in that prospectus. When I’m doing reviews at firms, I read a lot of prospectuses and not always the most interesting reading, but there’s a lot in there that can really tell you about what’s happening with that product. And on top of that, there are for certain products, such as variable annuities or maybe state differences in requirements. So that’s why the prospectus becomes very, very important.

If you’re recommending a rider – maybe it’s available in a state, maybe it isn’t – you want to make sure you’re talking to the client about that information and then you can document properly that we discussed these riders, it’s available in the state and they decided that they want it. Here’s why it’s good for them. So prospectus matters, documenting the conversation matters, and then, certainly on the brokerage side, that initial account opening process that has to be very well documented because you need that all the way up through the supervisory sign-off.  And then, ultimately, if it’s an application-based business, you know that mutual fund company or the insurance company is going to be looking at all that information as well.

Brent Nicks:  Len, something you said there just reminded me of one other item, which is all of the things that we’ve just been talking about. Having made the assumption that we’ve determined an account type and that recommendation for those that have it available starts with the account type and is a managed relationship more advantageous for the client, does it make more sense to stay more transaction-based?  While that decision is in your initial notes when you’re intaking a client, as you said a second ago, going to be part of all of those initial notes?

It’s important to remember this is not a one-time, set it and forget it type evaluation. If you have a long-term relationship with the client, that account type selection based on the client’s behavior, changes in their objectives, changes in their desires, may necessitate you adjusting that relationship from broker-dealer to advisory or vice versa, and those types of things need to also be documented as to why those changes may have been made along the way.

Ed Wegener:  And it sounds like if you’re going to be using discretion about when to document and when not to document, the rule of thumb really should be, if you think it’s going to get questioned, you should document the basis. So, if it’s a more complex product, if it’s a riskier product, if it’s the more costly alternative, there might be a reason for it. But make sure you document what that reason is. And, Len, I think you mentioned this earlier, is it’s the exchange of a variable annuity. That’s a priority that regulators are looking at.

So if you’re going to make an argument that your procedures are clear about when you should document and when you don’t need to, making sure that your reps and IARs in the field are trained on what those procedures are so that when they’re making these decisions about what to document and what not to, that they understand what your policies and procedures are around it, and then to periodically monitor to make sure people are following those policies and procedures. Those are all important things to consider.

Now, there’s some technology that’s out there that’s available where the technology captures the documentation for the basis, for those recommendations, and so that’s really capturing it in every case. But if there is discretion, it’s really good to make sure that you have good policies and procedures.

Len Derus: One other very important time to document your recommendations is especially if you are, or have, a very limited product or securities offering. So you’re not a general securities firm that offers everything – you’re very limited in what you can offer to your clients. Documenting that you fully understand what’s in the client’s portfolio, you understand their financial profile, their investment profile – you have all that information, you understand it and this you know. These couple of products that we only offer – these are still in your best interest. Here’s why. So, you have to really document it and be very, very aware.

If you have a very small product line that you’re selling, the more documentation there the better, to show that you understand the customer and the customer understands the decisions that are being made or the recommendation that’s being made.

I just wanted to put that out there. There are firms with very limited offerings, so I think that requirement, the necessity of it, greatly increases in those scenarios because you don’t have all that comparative stuff in-house. You really need to know the customer at that point.

Brent Nicks:  Right.

Ed Wegener:  And, when thinking about the best interest standard, the care obligation and this idea that you shouldn’t put your interests ahead of those of the customers, one of the things that comes up is conflicts of interest related to compensation driving the decision. I wonder if you can talk a little bit about what firms should be doing with respect to compensation-related conflicts of interest.

Len Derus: Yeah, compensation is interesting in terms of discussion. How do we make sure we’re treating everyone fairly? Here I’ll talk about a couple of things that are probably well-known out there. The contests of yesteryear are largely gone. Bonuses, those types of things, depending on how it’s structured, bonus can still work, but tied to a specific security, specific offerings – that’s problematic. Now, compensation regarding firms that have proprietary products and external products that they’re selling, what I have seen out there that firms are doing now is, they’re leveling compensation between all of the offerings.

So, you have a few mutual fund issuers that you’re selling, along with your own proprietary funds. What I have seen some firms do is level set whether it’s a proprietary fund, whether it’s one of the external funds that they’re selling. Whatever the payout to the rep is, that stays level. So, we’re not incentivizing that rep to sell the proprietary fund any more than they are the external fund. That then comes down to the costs. What are those funds invested in and how well do they fit into a portfolio? See if they’re in the best interest. Those are a couple of things to think about on compensation. Brent, if you have some others?

Brent Nicks:  I was just going to add off of the top. I think this again comes back a little bit to what the firms have done over and atop the advisors to assist them. Because, even in a more simplistic compensation program, we talk about bonuses and not tying them to products. Even if it’s a simple design around growth of AUM or just assets, that could still be problematic when you’re driving to either an account type or you’ve been given the general directive for growth based solely on growth sake, and maybe you’re not fully connecting the client to their objectives. Maybe they don’t need what you offer at all. Maybe you don’t need to be recommending anything because, early on, you’ve determined that the client’s not a good fit for your firm. You have to be okay with that.

That’s the ultimate recommendation is recognizing early on that you can’t mitigate your conflicts, or you’re going to have concerns if you try to service this account, and understanding that before you go down that rabbit hole. Performance fees are always, I understand, in the hedge fund, and some of the private space.  It’s a thing it’s got to be super well documented and understanding the issue that you always have with that. Is the performance-based compensation in line with the client’s overall objectives and is it with the manager?

If you’re dealing with someone, maybe it’s not you, maybe that performance-based compensation is based on something that you’ve brought in and made available to a sub-advisor. Is that in the client’s best interest and have they created enough value to make it worth it? So, all of that again has to be evaluated.

Here’s what I would recommend.  I would recommend at least annually coming back to your firm level compensation on how you deal with your outside vendors and your custodians, and what your rep shared. We’re talking about rep compensation, but also at the firm level, where the conflicts occur, and have you fully disclosed or mitigated them?

Coming back to the difference between fiduciary duty and Reg BI, you have under fiduciary duty, you either have to avoid it or disclose it. Under Reg BI, under the standard to try to mitigate the best you can that conflict, under what are you operating and what are you needing to tell your clients about your compensation programs? And from an RIA world, I always say were all parties aware of all parts at the beginning? Is your ADV accurate? What does your client agreement say? Were they fully aware of the program and the compensation as it works in practice? And then, is it in the best interest of the client? Is it fair? Is it weighted to the firm? You have to constantly evaluate that.

Ed Wegener:  It’s sounding like starting from the top is understanding what types of compensation causes conflicts that need to be eliminated the contests, the bonuses, then understanding what other conflicts that there are, make sure they’re disclosed and mitigated, and then having a means to monitor, to see from a compliance standpoint, to see where there might be some incentives or issues that you need to follow up on.

For example, if you have particular advisors or reps who are out selling one particular product all the time, that should be an indication that, hey, there might be something that we need to look into. So that monitoring on the back end is really important.

I want to go back to something that, Brent, you talked about a little bit earlier, and that’s the recommendations of account types. You spoke about it in terms of broker-dealer to investment advisor, investment advisor to broker-dealer account, but it’s also been talked about in terms of rollovers from an employer plan to an IRA. So, what should firms be considering when recommending account types?

Brent Nicks:  Under the Department of Labor’s Private Transaction Exempt in 2020-02, which is the formal rollover analysis process under ERISA, you need to make sure that, very similar to these other standards, that what you’re about to evaluate is indeed in the best interest of the client. Interestingly for this, very often, and the regulators in certain entities very often hone in on expense. And the thing that you’re going to find between plan to IRA rollovers in particular – although this rule also does cover IRA to IRA for example, a bank CD IRA and I’ve decided to move it to a brokerage firm – that still would be covered, requiring analysis under the exemption, because there’s different expenses, different risks and you needed to make a decision that this is in the best interest of the client.

But from plan to IRA, almost exclusively, the IRA is going to be more expensive. You’re hiring the advisor. There may be other expenses associated with it and not defrayed against all participants within the plan.  So, super important when you’re documenting the rollover effort is the services, the access to products, access to expertise, research.  The things that are actually the reasons why the client is determining to make the rollover to the IRA need to be well documented around. Simply the move, because very often it is going to be a more expensive proposition. You have to have documented what is that difference in expense getting the client. Sometimes it’s plans are retired, I’m retiring, I’m being forced to leave the plan. Those are different scenarios in regards to documentation.

But for those instances where I don’t necessarily have to remove the assets from the plan, you need to make that story. You need to connect A to B so that it’s perfectly clear why the more expensive IRA option very often not always makes sense for the client. All of that can be done through some standardized documentation or use of CRM, or a combination of both. But this is the one area where we have to come back and provide a fulsome report and attestation to the completeness of this Under the PTE. We have to create this retrospective review to say we have completed this analysis on each and every one of these.

Ed Wegener: And that’s one of the things where there’s a little bit of confusion.

Now that that PTE has been caught up in the courts and as it’s winding its way through the courts, a lot of firms have been confused in terms of, well, what are the requirements now with respect to rollovers?

One important thing to remember is that under Reg BI and the fiduciary requirements for investment advisors, the requirements in terms of that analysis are very similar. The SEC talked about that in their staff bulletin on account recommendations, that this is very similar to what’s expected under the DOL.

The one important difference, that you talked about, is actually having to provide the client with that rationale under the PTE. But that analysis is important and, to your point, you have to justify the recommendation, even if it’s a more costly recommendation. So, one of the things that you absolutely have to make sure that you’re able to get is, what are the costs of the plan that they’re rolling out of? Because you need to know that difference in cost between the employer plan and the IRA and do these new services and features, et cetera, do they justify that cost? If that cost is really big, you’re going to have to have more justification that you’re going to need to provide.

Brent Nicks:  Absolutely. Having spent a lot of time working with and working for pension consultant firms, there’s a number of ways you can get that information, because very often you’re going to ask your client and they’re not going to know. They’ve been given certain information over the years, but they often don’t keep up with it.

A lot of firms rely on benchmarking. There’s a number of ways that you can get that done, based on number of participants, plan size, whatever, and that’s a reasonable litmus test to the expectation of the plan, but it’s not going to be specific to that plan. But you can get it off of databases that maintain Form 5500 filings, if the client happens to have some of the documentation that they received from their third-party administrator on the plan. It’s an imperfect science, but the fallback default again is reasonable benchmarking from a reputable service that’s got good details so that you can again close that gap.

And I would like to just close with, you said it a second ago Ed, all of those things that were being required of rollovers are all the same type of analysis that you’re doing for the onboarding of any other client, and regardless of what is prescribed under the PTE. I couch this all as best practice. These are all things you should have been doing anyway and from a counseling standpoint, yes, as all of this is winding its way through the courts, I would advise individuals to all of these aspects to just stay the course, because these are all great practices to insulate yourself from scrutiny down the road.

Ed Wegener:  So, speaking of practices, you guys have been working with clients as they’ve implemented these, gone through examinations, made changes as a result of those examinations. What are some of the practices that you’ve seen firms employing to really help them manage this process?

Brent Nicks:  Well, I could just say, from spending time in RIAs only and dual registrants, often I’ve seen that to be done using analysis flow – we’ll call it worksheets documenting the tick marks to trying to take it to the technical aspects of things and less of the subjective matters. And, while I think that’s while it’s important, I don’t think it’s the entirety of things that should be considered and documented.

Firms of any size have very often taken these to electronic resources built into their CRMs, where they’re collecting certain data points, or even requiring the analysis worksheets to be provided at the point of account opening, to be signed off on by a branch manager, to be reviewed by compliance. The ongoing analysis is really part Rep and part firm, and hopefully firms have taken the time to consider what kind of technology resources might be useful for them to analyze or identify where account type selections or other types of recommendations or advice may be deviating from the client’s goals and objectives.

If you’re a smaller firm, maybe, where a handful of individuals can know most of the clients and can be really high-touch, maybe you can get away with that, but in today’s day and age, I think an analytical tool of some time to assist you in discussing and breaking down all of these data points is an almost must.

Len Derus:  And on the broker-dealer side, Ed, a lot of firms are trying to provide tools to their reps: – worksheets listing out here’s variable annuities we offer, here’s kind of the key points of those cost, types of writers, various things like that – so the rep can then attest to on that form. It is something that gets provided with the application. Here’s what I talked to the client about, so it’s a way that they can document what they talked about, to get it out of the kind of ad hoc, free-flowing writing notes and providing that to your supervisor.

I’ve seen entries on application documents where it’s kind of standardized there, and then you have an open field where you can put your extra notes about the client or the product or why it fits, things like that. So, try to provide tools to standardize a little bit, as best you can, it helps the review process.

The issue with standardizing is, sometimes it’s too simplistic and if it’s too simplistic you don’t know really what was or was not discussed there. Notes on the side anyway in the customer file is very important. But tools such as that how can we provide a tool that allow the rep to easily document what they talked about, which products, which offerings, which alternatives, and then, along with that, the last thing I would want to touch on is really the tool in the broker-dealers around the compliance obligation, how they structure their procedures and then the requirements around that are enforcing the procedures right. So if you require this document to be used, it says it in the procedures is everyone using it? Are you collecting it each time? And you have to make sure that that’s happening. So you have to enforce those.

And then, obviously, providing the training that the reps need. So, a new rep getting just hired in, they’re going to need different training than a rep that’s been around for 15 years, or the last four years with Reg BI – they understand it. But is it appropriate to that individual the kind of training you’re getting? So that’s kind of the tool base that I’ve seen out there with broker-dealers.

Ed Wegener:  It seems like this question about should you be using a manual process with forms versus some type of technology or some combination of the two is something that the industry is kind of evaluating and evolving around and the rule doesn’t specify either.

But some of the challenges that I’ve seen in using forms versus some type of technology is trying to get consistency across your advisors.  Like you were talking about Len, where you don’t want to have significant differences when somebody’s filling something, one rep’s filling something out one way and another rep’s filling it out a different way.

And then the other thing is being able to monitor over time. When you’re using a form and those forms are going into a file somewhere, it’s very difficult to monitor, to see what’s actually happening out there, and technology allows you a little bit more of ability to be able to monitor across transactions and see are there areas that I need to be following up on. And with whether it’s forms or technologies that point about like, how do you document that? I’ve seen firms go from well, we’re going to start by using bullet points and they say, well, that’s not giving us the information, so then they go to free form. The free form is all over the place, and it seems like it’s moving to some combination of bullet points with some free form to make sure you’re capturing all that information. But again, it’s like anything else: you’ve got to review it periodically to see how effective it is and if you need to make changes as a result of what you’re seeing, it is and if you need to make changes as a result of what you’re seeing.

Len Derus:  Yeah, and related to is it effective, right? In conducting certain annual reviews for firms, we review accounts and the documentation, things like that. On occasion you’ll see, and I’m sure it occurs in quite a few firms where you’re looking at a particular rep, and it seems like that justification or the rationale are very similar, if not exactly the same, right? So that cookie cutter rationale, it’s tough to find that, if it’s on a document that gets filed away every time or it gets into an electronic file.

So, part of that compliance obligation is enforcement of your procedures. Part of that enforcement is to know that you know people aren’t trying to game the system just using a cookie cutter approach, because they know it got signed off on 10 times. Be sure that, as you’re reviewing the accounts as a supervisor when the transactions are coming in, the rationale makes sense. But that control on top we talked about makes sense. Take a look over the last six months, the last year, of individuals and to see, hey, are they truly understanding the clients or are they kind of taking a one size fits all approach?

Ed, going all the way back to the start. Right, suitability versus, you know, regulation BI, like what’s the differences? That was still an issue under suitability – the cookie cutter approach and it’s still an issue here. So we’re covering the same issues, but they’re covering them a little bit differently in the rules and how they’re structured. I think they’ve given probably a little bit better structure to the firms by breaking these things out: here’s what you have to do, here’s your disclosure, here’s your care obligation, here’s your compliance obligation. They have a more structured approach than, let’s say, suitability.

Ed Wegener:  Absolutely. You don’t want to find these things out as part of an examination, right?

Brent Nicks:  I was going to say that’s the cautionary tale. The extra structure has also provided the opportunity for more black and white adherence for the regulators. It was tougher to analyze and hold people’s feet to the fire on certain things before, and now the burden is, I won’t say easier for them to reach, but certainly easier for them to justify, under Reg BI in particular.

Ed Wegener:  You are not meeting it or you are, I think ,and that goes back to what we were talking about before – this really just provides the regulators with additional tools to be able to address those concerns that they’ve always had? So well, listen, really appreciate your guys’ insight on this Very important topic and something that I’m sure we’re going to be talking about for the next several years to come. So really appreciate your analysis here and we will be talking to you soon. Thank you very much.

Brent Nicks:  Thank you, Ed.