Compliance & Regulation

FSI Releases White Paper on Outside Business Activities

To develop ‘greater clarity of expectations’ for advisors

of WASHINGTON, D.C. – Today, the Financial Services Institute (FSI) released its white paper on outside business activities (OBAs).

The white paper was written in conjunction with FSI Partner Law Firm sponsor Eversheds Sutherland (US) LLP and members of the FSI Compliance and Investment Advisory Services Councils. It provides important benchmarking for independent financial services firms as well as helpful information on ways firms seek to identify undisclosed OBAs.

The release of the white paper is timely as FINRA is currently reviewing its OBA rule as part of its retrospective rule review process.

 

Actionable Common and Innovative Practices

“By leveraging the insight of our members and applying the extensive experience of our partners, we can provide actionable common and innovative practices to help our members respond to common issues and pitfalls regarding outside business activities,” said FSI President & CEO Dale Brown. “We are proud to assist the independent financial services industry in developing greater clarity on the expectations of both FINRA and the states so our members can continue to allow their financial advisors to provide these crucial services while also ensuring compliance.”

The white paper found that OBAs play a unique role in the independent financial services industry in that they take a variety of forms and allow financial advisors to better serve the needs and demands of their clients, particularly those in more rural or sparse areas. It also outlines many of the extensive approval and monitoring efforts independent financial services firms use to comply with FINRA and state regulatory requirements related to OBAs.

FSI’s OBA white paper also contains useful reference information for firms, including:

  • Case studies from 11 independent financial services firms,
  • Helpful examples of ways firms are currently working to identify undisclosed OBAs,
  • Various OBA-related enforcement actions.

Other findings include:

  • Value of OBAs in the independent channel, both for financial advisors and for investors,
  • Scope of outside business activity,
  • Regulatory and compliance framework for OBAs, and
  • Consequences for failing to comply with OBA regulatory requirements.
  • Click here to download the white paper.

 

Excerpts from the Whitepaper

Why do financial advisors engage in OBAs?
Simply put, financial advisors engage in OBAs because it is often what their clients expect and need. This is particularly true for financial advisors who operate in sparsely populated or rural areas where a variety of professional services are not available to clients. Instead, clients need to work with a professional who can provide them everything they need in one stop.

Additionally, independent financial advisors are small business owners. The ability for these advisors to operate their business, pay their staff, and continue to provide crucial retirement and investment advice to their clients is made possible by their ability to offer services outside their securities offerings. These services enable independent financial advisors to hire and maintain their staff from the local community.

OBAs play a unique role in the independent financial services industry in that they take a variety of forms and allow financial advisors to better serve the needs and demands of their clients

FSI members in particular benefit from being able to maintain a strong presence in their communities. According to the 2016 Oxford Economics Study of the Economic Impact of FSI members, FSI members support more than 482,000 jobs.
These firms directly support the employment of more than 160,000 financial advisors and support staff. In addition, for each
independent financial advisor directly affiliated with an FSI member firm, a further two jobs are supported in the wider economy, either in the supply chains of FSI members or through the wage spending of those employed in the firms themselves or in their supply chains (in total 322,000 additional jobs in industries as diverse as professional services, restaurants and hospitality). By engaging in OBAs, FSI members have enough financial flexibility to support their staff and local community

How do OBAs benefit clients and the community?
Independent financial advisors engage in various OBAs because these services are often not widely available to their clients. As we said in a recent comment letter to FINRA, “Clients of independent financial advisors are typically ‘main street Americans’ who have tens and hundreds of thousands as opposed to millions of dollars to invest. Often, these financial advisors are the only provider of financial services and planning in their community.”

Independent financial advisors share a unique relationship with their clients. Financial advisors, who may also be Certified Public Accountants or insurance agents, have the best understanding of their clients’ overall financial situation. They have knowledge about their clients’ holistic financial profiles, allowing the financial advisor to understand the specific needs of each client. The ability to provide holistic advice benefits clients by ensuring their financial plan is designed to achieve their goals. Knowing that the financial advisor’s recommendations are based on a thorough understanding of their current financial status provides the client additional confidence and comfort. Independent financial advisors are therefore in the best position to advise their clients, for example, on the tax implications of financial decisions or suitable insurance options to meet their needs.

Often, these additional, crucial services are only available as OBAs from independent financial advisors. This is particularly true in rural or sparsely populated areas where insurance or accounting firms are not located. Independent financial advisors are uniquely situated to fill this gap because they are spread throughout the country where larger firms often do not conduct business.

OBAs are often essential to service the needs of clients in rural and sparsely populated communities who don’t have the luxury of choosing from a multitude of qualified professionals. But clients in urban and suburban communities benefit from OBAs as well. Modern clients expect efficiency in both service and cost, and OBAs fulfill this need by allowing a client multiple services from one individual. Clients can work with and receive services from the individual they trust and
prefer to work with.

Additionally, the local community benefits from a financial advisor’s involvement in OBAs as well. The community benefits from tax revenues and jobs created by these small businesses. Advisors can even leverage their specialized financial expertise and OBAs to better serve local nonprofits and businesses by participating effectively on local nonprofit boards or by sharing their knowledge of the financial and other needs of the community. OBAs thus allow advisors to serve a vital role in their community and better serve its residents.

The findings in the paper were based on a survey of numerous FSI member firms.

Read the entire whitepaper here.

 

About the Financial Services Institute (FSI): The Financial Services Institute (FSI) is the only organization advocating solely on behalf of independent financial advisors and independent financial services firms. Since 2004, through advocacy, education and public awareness, FSI has successfully promoted a more responsible regulatory environment for more than 100 independent financial services firm members and their 160,000+ affiliated financial advisors – which comprise over 60% of all producing registered representatives. We effect change through involvement in FINRA governance as well as constructive engagement in the regulatory and legislative processes, working to create a healthier regulatory environment for our members so they can provide affordable, objective advice to hard-working Main Street Americans. For more information, please visit financialservices.org.