Get ahead on the client-focused reforms

Advisors could begin to use technology now to stay onside of the CSA’s proposed client-focused reforms when they take effect

By: David Reeve December 10, 2018
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The Canadian Securities Administrators’ (CSA) proposed client-focused reforms are expected to impose additional compliance obligations on financial advisors and their dealers relating to “know your client” (KYC), “know your product” (KYP) and disclosure requirements as well as potential conflicts of interest. Although the financial services industry is awaiting word from the CSA on what the final version of the rules will look like now that the comment period has come to an end, there are steps financial advisors and their firms could begin to take now to be prepared better for when the changes do take place.

For example, enhancements to KYC requirements will result in advisors collecting and updating information in six categories and at least 20 points of data annually for most clients. Thus, increased disclosure responsibility will create significant new record-keeping requirements for compliant advisors. Fortunately, technology is keeping pace with these new regulations as there are several excellent KYC software applications that ensure advisors stay onside while increasing the convenience of the process for clients through self-service options. Implementing such tech tools is a win/win for all players.

However, the industry is raising bigger concerns around the increased requirements for KYP due to significant anticipated process changes to meet this regulation. Advisors and dealers have an obligation to understand essential elements of the products they sell, including how they compare to similar products in the market, with the ultimate goal that the client receives the best recommendation.

If you look at the investment funds industry alone, there are more than 40,000 products available to investors. The sheer magnitude of data that measure performance, risk and cost of this number of products is daunting, to say the least. As a result, many dealers are planning to reduce the number of products they offer to advisors and their investors. Although this strategy may make advisors’ and their dealers’ KYP obligations lighter, it ultimately doesn’t serve the best interests of their clients.

The recent third stage of the point-of-sale regulations and the second phase of the client relationship model regulations helped set the table for KYP as these regulations require advisors and dealers to disclose performance, risk and cost data on the mutual funds they recommend to their clients. The next phase of KYP regulations will require a significant expansion of this obligation to not only present data on recommended products, but also disclose how the recommended products compare with similar products in the market.

We expect that technology will once again come to the rescue. Software applications that compare key performance data across similar products will arm advisors and dealers with the disclosure information that will likely be required to meet the new regulatory regime. Imagine a disclosure document that places a recommended mutual fund product on a spectrum of options using a percentile ranking or similar comparison so that the client is clear on comparative options. Some industry players fear that regulation will go further than this disclosure requirement, but we should keep in mind that recent investment fund regulations have been limited to providing adequate investor disclosure.

Many dealers already are investigating technology-based strategies to help them meet these new compliance challenges. Advisors and dealers that leverage these tools will be the winners. A recent study from U.S.-based Fidelity Clearing & Custody Solutions revealed that tech-savvy advisors already are enjoying assets under management that are 42% higher than their peers and earning commissions that are 24% higher. Embracing tech that enables better communication on KYC and KYP will ensure that tech-savvy advisors maintain and grow this advantage.