The wealth management industry is evolving rapidly. With the rise of new asset classes like crypto, private credit and real estate strategies, alongside advancements in artificial intelligence (AI), financial advisors face a host of new opportunities – and challenges.
With innovation comes increased regulatory scrutiny. The Securities and Exchange Commission (SEC) is paying close attention, preparing for 2025 with a focus on compliance risks tied to these developments.
Here are three key areas to consider as you navigate these changes and prepare your firm to meet emerging standards.
Are we continuing to act as fiduciaries?
One of the first questions advisors must address is how new asset classes fit into their fiduciary responsibilities. For example, adding crypto or alternative investments to a client’s portfolio requires clear processes and procedures, including transparent fee disclosures.
This isn’t new territory. The Fiduciary Rule has been evolving since 2017, when FINRA launched initiatives to protect senior investors from fraud and improper advice. The SEC expanded these efforts in 2018, introducing Regulation Best Interest (Reg BI), Fiduciary Interpretation and the Form CRS Relationship Summary.
With the rise of alternative assets, fiduciary responsibilities have only grown more complex. Advisors must ensure their processes reflect these changes and continue to prioritize clients’ best interests.
Are we disclosing possible conflicts of interest?
Another area of concern involves conflicts of interest, particularly for firms acting as both Broker-Dealers and Investment Advisors. The SEC is focusing on how well these dual roles and related histories are disclosed to clients.
For example, when Broker-Dealer accounts transition into Advisory accounts, it’s essential to meet fiduciary obligations despite potential conflicts. Reg BI highlights four key obligations to ensure this standard: Disclosure, Care, Conflict of Interest and Compliance.
The bottom line? Transparency is non-negotiable. Firms must be proactive in addressing and documenting conflicts to maintain trust and meet regulatory standards.
Is our intelligence artificial?
Advancements in AI and machine learning are transforming investment management, enabling automation in trading strategies. However, these technologies introduce new risks, and the SEC wants to ensure firms have robust controls in place.
Any AI-driven solution must include a clear risk framework and two critical components:
- Pragmatics (Human Oversight): Ensure there’s always a “human in the loop” to oversee trades and intervene when algorithms fall below confidence thresholds.
- Provenance (Auditability): Maintain detailed records of transactions and process automations to ensure full transparency and accountability.
AI is only as good as the safeguards surrounding it. Human oversight and auditability are key to mitigating risks and staying compliant.
Preparing for 2025: the intersection of compliance and distribution
With the growing adoption of alternative assets and AI technologies, compliance risks are intersecting with distribution strategies like never before. Now is the time to evaluate your processes, strengthen your frameworks and ensure your firm is ready to meet regulatory expectations.
Continue to reflect on these questions:
- Are we effectively disclosing fees and processes for alternative asset classes to our clients?
- How well are we identifying and managing potential conflicts of interest?
- Do our AI-driven strategies include safeguards like human oversight and auditability?
- Are our compliance frameworks aligned with the latest regulatory developments?
- Have we prepared our teams for the evolving compliance landscape in 2025?
The good news? You don’t have to navigate these challenges alone. Revela Advisors and Joseph Caruso & Associates bring expertise in investment advisory, demand generation and compliance risks to help your firm confidently adapt to this changing landscape.
Contact us to start the conversation.
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