Advisors Require Tech as Pre-trade Obligations Grow

Firms that deliver on digital documentation and disclosure will reduce audit risk

The wealth industry has faced an unprecedented wave of new regulations over the last decade, and 2022 may be the most challenging regulatory year yet for firms.

In Canada, the client-focused reforms (CFRs) have been in effect since the start of the new year. In the U.S. regulation best interest enforcement actions are rising, and the Department of Labor’s prohibited transaction exemption 2020-02, which requires advice on retirement accounts to be in clients’ best interests, had a deadline of January 31. Wealth firms on both sides of the border need to ensure that their advisors meet these demanding new “best interest” requirements.

In particular, these regulations place a greater emphasis on advisor recommendations prior to the trade, requiring new workflows, processes and technologies to remain compliant.

Wealth firms and advisors tend to focus on advisor-facing tools and processes, which makes sense, as advisor adoption is paramount to project success. However, neglecting requirements for record-keeping and disclosure may introduce significant risk to firms and advisors.

A well-known adage in the compliance world is important to remember: “If it’s not documented, it doesn’t exist.” Regulators focus on consistent process, documentation and disclosure. Firms that rely on their advisors to document compliance activities in disparate systems and applications increase audit risk.

The new know-your-product (KYP) requirements combined with the exponential growth in product data suggest that the days of relying on the “email bug hunt” or “data dumpster dive” are gone. It’s vital that firms invest in an industrial-strength digital record-keeping and disclosure platform as the foundation of their new technology and processes.

On the disclosure front, regulators expect to see evidence of timely pre-trade disclosure. We’ve learned from recent regulations such as point of sale (POS3), which requires pre-trade delivery of fund disclosure documents to investors, that the only practical method of pre-trade disclosure is digital. Firms that continue to use physical mail for investor disclosure add unnecessary friction and delay to the investment process — impacting investors and advisors alike. The highly compelling business case for digital (versus physical mail) disclosure is another strong incentive for this investment!

Much of the new disclosure requirements are well defined by regulators. In Canada, this includes the amended relationship disclosure information (RDI), and in the U.S., the client relationships summary (Form CRS) and rollover analysis.

Beyond these regulated disclosures, leading advisors recognize the value of timely, transparent and digital disclosure as an opportunity to build trust, turning compliance into a competitive advantage. In a recent advisor survey with a top U.S. broker-dealer, 60% of advisors said they’d voluntarily provide digital disclosure of their KYP analysis to investors as an integral part of their advice relationship.

As the wealth industry grapples with these new compliance challenges, it’s vital to keep record-keeping and disclosure high on the regulatory agenda. Regtech solutions that offer integrated functionality will substantially reduce the project investment cost and implementation time for wealth firms. All indications suggest that the regulators’ expectations will increase in 2022, and firms that equip themselves with a strong documentation and disclosure capability will be the winners.


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