This article is the first in an ongoing series on the client-focused reforms, which will place investors’ interests first in their dealings with financial advisors and dealer firms and have a consequential impact on advisors and the investment industry.
Consider the forces affecting the way Canadians manage their financial lives and plan for retirement, and there’s a common theme apparent. The broad push toward lower fees, greater digitization, holistic planning, and democratization of financial tools is putting more control into the hands of everyday investors and changing the role of financial advisors permanently.
The next major step in the shift toward greater client centricity is the introduction of the client-focused reforms (CFRs), which will come into effect fully by the end of the year. And while these reforms are designed with clients’ best interests in mind, they will affect the day-to-day operations of advisors across the country.
Although some of the changes reflect a codification of good industry practices, every advisor and firm will have to update aspects of their policies, client-facing documentation, books and record-keeping, and training. The bar will also be raised for know-your-client (KYC), know-your-product (KYP), suitability, potential conflicts of interest, and relationship disclosure.
The CFRs will only add to the acceleration of the drive to embrace technology that the COVID-19 pandemic has brought on. According to a recent survey from Broadridge Financial Solutions Inc.*, 63 per cent of advisors in North America reported that they communicate with clients on at least a weekly basis.
Nonetheless, a startling 74 per cent of advisors reported they wish their firm had better access to digital tools and 51 per cent stated they would leave their current firms in search of better technology. Furthermore, 77 per cent of advisors reported losing business during the pandemic because of inadequate technology.
Some firms will see the new regulations as a compliance hurdle and will make the requisite reactive workarounds to accommodate. But while compliance will always be part of the business, it doesn’t have to be the driving force for change.
Rather, the CFRs are indicative of a more client-centric approach to investing than an advisor-centric or account-centric one. Just about every industry in the world is more client-centric than it was 20 years ago. The investment industry has some catching up to do, and for forward-looking firms, the CFRs may well provide the impetus to set a new strategic imperative in this direction.
As such, forward-looking firms will see the CFRs as a powerful lever to transform processes and technology. These firms will use the investments demanded by the CFRs to set their technology on a strategic path toward an integrated digital environment – one that allows them to offer their clients the holistic experience they demand increasingly.
Here are seven ways in which advisors and wealth management firms will be required to adapt their processes, activities and approaches to meet the higher bar the CFRs will set.
1. New onboarding and account disclosures
Advisors will be required to provide new clients or current clients who are opening new accounts with a clear understanding of the scope of products and services offered. That includes information on the impact of investing costs, including compounding effects, and any limitations relating to the products and services offered, such as if clients will only be offered proprietary products.
2. KYC will need to be current
Advisors will be required to hold periodic reviews that measure securities against suitability. That includes keeping the client’s KYC information “current,” which entails being aware of any significant change in the client’s information. Updates should be based on “meaningful and documented interaction” with the client and be tailored to reflect advisors’ relationships with clients and the securities and services they offer. For example, if the securities sold are illiquid or highly risky, more information, including investments held elsewhere, might need to be gathered.
3. Keeping up with KYP won’t be easy
For individual securities, the new KYP rules will not affect most advisors, who are well versed in the stocks and bonds they recommend. That changes with mutual funds, exchange-traded funds and other bundled products, as well as new securities. Given the complexity of these products and the associated difficulty of deciding suitability, firms may choose to restrict what advisors can offer to certain clients or groups of clients. That will result in either further administration and paperwork for advisors, or an investment in improved client-centric technology that applies restrictions at the source and is maintained and updated centrally.
4. Clearer disclosure on fees, expenses and operating charges
If advisors have a simple fee model based on assets under management, they can be more specific and use examples in describing their fees easily. If advisors rely on a mix of transaction fees and trailing commissions, the firm will be making decisions as to the extent that disclosure can be standardized. Firms will need to make judgments on striking the right balance between providing enough information without overwhelming their clientele; advisors, to a lesser extent, will need to do this with each client.
5. Who makes the decision on conflict of interest?
The bar for conflict of interest has been raised, moving advisors closer to becoming fiduciaries. The big question is, who decides when there is a conflict of interest? By what process? Leaving this up to the individual advisor could be a dangerous path for firms to take, putting both firms and advisors at risk. A digital, centralized real-time approach to compliance may be the only sustainable way to meet these new regulations
6. Suitability will take on greater importance
Advisors will now have to make a suitability determination before most “investment actions” that encompasses almost anything they might do for a client – from opening an account, to making a recommendation to buying, selling, exchanging or transferring securities. “Suitability” is a complex mix of KYC information, KYP assessment, measure of account impact, liquidity and costs. It has always involved judgment calls, but with the new stricter requirements on almost every aspect of account management, advisors will need to be sure they have ticked every box and documented their activities before taking any investment action.
7. Building a sustainable process for training and documentation
Firms are required to deliver training on all of the above requirements, particularly KYC, KYP and suitability. As well, firms need to make decisions about record keeping, including new written policies and procedures, client-facing documents and internal documents. These changes may be among the biggest and most onerous. In turn, they will require building and maintaining a sustainable process that can deliver all necessary support information in the case of an audit. Notes kept by individual advisors are an accident waiting to happen.
*Donna Bristow is managing director, North American Wealth, at Broadridge Financial Solutions Inc. in Toronto.