Leveraging Tech to Comply with the Investment Industry’s Client Focused Reforms

Leveraging Tech to Comply with the Investment Industry’s Client Focused Reforms

Article

CFR will reduce complexity for clients‒at a cost

The Canadian Securities Administrator’s new Client Focused Reforms present significant compliance challenges for financial advisors and their firms. Amongst the biggest challenges are increased requirements for documenting investment suitability (Know your Client) and advisor knowledge of products (Know your Product).

The new standard requires advisors to understand an investment’s features, structure, risks, initial and ongoing costs. They then need to consider the potential and actual impact of those costs on a client’s return on investment. And all of this has to be aligned with the investors’ financial situation, time horizon, risk tolerance and level of investment knowledge.

What does this mean for all stakeholders going forward?

Asset Managers, Dealers (both MFDA and IIROC), and Advisors have all had to adapt to new CFR standards. One of the most fundamental issues everyone has to address is the proliferation of investment products, their complexity and how to manage the process of demonstrating and documenting an in-depth knowledge of the products being recommended. There are just too many products for advisors or dealers to be able to understand every one deeply enough to demonstrate suitability for a client. The scope of the ‘ask’ has therefore to be automated.

This means most stakeholders have, or still are, conducting an audit of all the products they offer and an assessing which ones will continue to be provided to clients. To do that in a viable manner, assessing the viability of their products through the CFR lens requires advisors and firms to use technology to automate the process as much as possible.

Asset managers and funds manufacturers need to equip advisors and dealers to tell a good news story about fewer available assets, while keeping them current on trends and updates to the products.

Balancing client attention and retention

CFR will benefit clients, but it will also require more from them. The financial planning process does take longer as the advisor needs to dive deeper in understanding client needs and investment solutions are researched in more detail as demanded by the new standards.

For advisors, distributors and manufacturers, this creates risk. No stakeholders can afford to lose clients because of a frustrating or overly complicated process. The firms that do the best job of defining and implementing a flow that keeps clients engaged will develop an advantage.

Advisor-client communication has evolved

Asset managers and funds manufacturers need to equip advisors and dealers to tell a good news story about fewer available assets, while keeping them current on trends and updates to the products. Not only do products need to be designed to fit particular suitability requirements, but they also have to be presented in simple terms, easy to assign to a given portfolio mix.

Beyond clear communication around how products suit different types of clients with different needs and risk tolerances, suitability requirements mean that advisors will need to spend more time with each client. Managing governance processes becomes very important, as due diligence and documentation requirements dictate that any material changes to a product or portfolio are discussed with the client and compared to their goals, risk, and capacity.

How will relationships between client and advisors/dealers change?

In order to remain CFR compliant over the life of a client relationship, advisors have to re-imagine the end-to-end client experience, from prospecting to financial planning to regular reviews and communication.

New onboarding processes, documentation, annual and life event updates on KYC triggers and ongoing client product reporting updates will need to be designed and implemented. The increased frequency and depth of interactions will lead to more connected relationships with clients.

Choosing the right tech stack is vital to enabling advisors and dealers to overcome the additional burden that CFR requirements have placed on them.

What about asset managers/manufacturers?

Asset managers and fund manufacturers are also affected by the new CFR requirements. Products will have to be re-defined to make them easier to approve as part of the firm’s internal governance process.

At the same time, evolving distributor needs will have to be monitored and new products or educational collateral may be required to match the market’s demands‒as in the case of increased client need for ESG-based funds or sustainable investing solutions.

Technology solutions for CFR compliance

Choosing the right tech stack is vital to enabling advisors and dealers to overcome the additional burden that CFR requirements have placed on them. Already cumbersome processes must be streamlined and automated. Leveraging digital tools that support KYC and KYP is a necessity.

Tech solutions that can help advisors efficiently and effectively meet the increased requirements for documenting investment suitability (Know your Client) and advisor knowledge of products (Know your Product) should include an asset allocation and financial planning platform that helps them conduct savings goal planning and investment portfolio design and analysis.

Features to look for that will help meet KYC requirements, include:

• Documentation of a client’s personal and financial circumstances

• Identification of investment needs and objectives

• Investor profile questionnaires to determine a client’s financial situation, time horizon, risk tolerance and level of investment knowledge

• Timestamped notes that provide a compliance audit trail

• Asset allocation analysis to demonstrate the advisor has designed a suitable portfolio based on client needs

• Benefits & risk/return perspective pages that highlight differences between the current portfolio and proposed

Important KYP features would include:

The ability to perform deep-dive due diligence on investment solutions considered for the client

The ability to efficiently select suitable alternative investment solutions for comparison

• The capability to illustrate current and proposed costs, fees, and their impact on client goals

• Asset distribution summaries that enable advisors to compare and understand asset concentration

Wrap up

CFR requirements will create a wave of change amongst all stakeholders in the industry. Products will need to be more clearly matched to needs in order to be internally approved, and advisors will need help navigating the new processes as they interact with their clients.

Technology will play an important role in helping all parties understand client needs and the products that solve them. The right solutions will make it easier for advisors to streamline their sales and review processes, identify the important client requirements and perform comparisons and analysis that will lead to the most appropriate investment choices for their customers.