As investment and mutual fund dealers work toward meeting the new requirements that are part of the client-focused reforms that come into effect on Dec. 31, they’re spending significant effort to ensure they have the proper policies, procedures, and controls in place to satisfy the enhanced know-your-product (KYP) rules.
Specifically, firms are aiming to provide their financial advisors with ways to compare securities, including equities and investment funds, before they recommend or sell these products to their clients. And with thousands of equities, mutual funds, and exchange-traded funds to choose from, that presents an information-management headache.
Technology will be critical for distilling product knowledge and presenting it in an easily digestible way for advisors, says Karin Yorfido, general manager for global technology and operations in Canada at financial software vendor Broadridge Financial Solutions Inc.
“Information needs to be right-sized for advisors,” she says.
Technology makes it easier for advisors to comply with the new regulations, which require them to take reasonable steps to know the products they’re recommending, she adds. For example, when an advisor selects a product, Broadridge’s new KYP comparison software analyzes information from thousands of securities and compares the most appropriate alternatives.
It not only presents securities based on consistent, predefined rules, but it records the advisor’s access to that data and where they came from. This produces a record that auditors can use to check that the advisor is following the regulatory requirements.
Broadridge sourced its KYP solution from Skymantle Technologies Inc., a Toronto-based financial technology firm that’s also offering the cloud-based service to other software vendors along with dealers who need a fast solution to address the KYP challenge, says Raymond Dong, the company’s co-founder.
Skymantle’s solution uses a “bring your own data” approach. Dealers or software vendors that use it must plug their own data sources into the system, which will then create a robust comparison for advisors. Most of the time, dealers will source those data from providers such as Fundata Canada Inc or QuoteMedia Inc.
The KYP rules are principles-based, meaning that there are no set prescriptions for how to compare securities. That decision comes down to the organization implementing the tool, says Raymond Chris, technical advisor at Skymantle, who points out that no two compliance departments are the same.
“There are hundreds of data points that we could surface, but not all of them are relevant,” he says. “Everybody will want to look at different data points.”
Parham Nasseri, vice-president, regulatory strategy and partnerships, at Toronto-based fintech provider InvestorCOM Inc., says the company’s PeerCompare tool is also data-agnostic, integrating with whichever sources the dealer choose. The company relies on the Canadian Investment Fund Securities Standards Committee (CIFSC) categories for grouping fund products, but can also filter equities to provide appropriate alternatives by comparing many data points behind the scenes.
The challenges for advisors don’t end when they’ve sold a stock or investment fund to their clients. The enhanced KYP rules that are part of the client-focused reforms require them to monitor these securities for material changes.
Advisors must address this issue, Mr. Nasseri says, as there are a significant amount of material changes in securities. InvestorCOM assessed mutual funds sold in Canada and found that the average product shelf sees 2,000 changes each week. Its ShelfMonitor product checks for those changes and then provides a list of significant data points out of the box, but also allows dealers to configure their own. It will then highlight changes for advisors.
Skymantle’s product also allows dealers to configure rules determining what constitutes a significant change. Each software partner or dealer will configure the system according to principles defined by their own compliance teams, Mr. Chris says.
Dealers and advisors will want to integrate these tools with other software such as customer relationship management (CRM) software. Mr. Nasseri says InvestorCOM’s products integrate with the most popular CRM systems for advisors out of the box.
Skymantle provides a software interface that allows dealers or software partners to integrate the solution with their own back-end systems to ensure that they exchange data and transaction information with their own workflows. The company will tailor custom user interfaces to fit customer workflows and even configure single sign-on so that advisors can access their product comparison tool automatically using the same login credentials as their other software.
Dealers should think about their broader technology strategy when acquiring software to handle their KYP processes, says Ms. Yorfido of Broadridge. Specifically, these tools should be able to add more functionality by introducing more modules or integrating with other services easily.
“Ensure that the technology has an extensible future,” she says.