Client-focused reforms (CFRs) may have come out at the end of 2021, but the industry still has much more to do to ensure the process works more efficiently and effectively for both clients and advisors, according to a recent forum put on by the Investment Industry Association of Canada (IIAC). 

CFRs are a principles-based set of rules that allow firms to adopt approaches that are appropriate for their business models. Advisor firms must also put clients’ interests first and include enhanced suitability, know your client and know your product standards – all of which will need to include better technology, said Jeff Harvie from software firm Four Eyes Financial. 

Harvie said the industry needs to improve the overall advisor experience, mostly by reducing administrative drag and increasing pre-trade acceptance.

“I think we have a lot to do as an organization and bringing together different vendor solutions sometimes challenges that, sometimes helps that. We approached this in a very partnership way and that creates some advantages but it also creates opportunities for us, over time, to create less resistance in the overall process.” 

As with all new products and systems, it takes a while for firms and advisors to get used to new rules and what suits them best. Dealers should be looking at data elements with unique meanings and categories, said Harvie. 

Product selection and due diligence 

“I think what has changed is that regulators are going to be looking at product selection and due diligence in a much heightened way,” he said. “To be compliant and scale [with CFRs] you need technology.” 

Speakers at the webinar talked about different “sleeves” of technology for dealer and advisor requirements. Data is a crucial component for advisors to make their particular selection of products to clients, he said. 

“Technology will help advisors drive their practice and at the same time provide visibility for the dealer to manage their business.” 

David Carr-Pries, vice president of InvestorCOM Inc. which provides regulatory compliance software, said it was too early to highlight best CFR practices, agreeing they require both technology and clear definitions. 

Tracking data points 

Some firms are waiting to see how everything shakes out over the next 12 -16 months. While some are tracking only one or two data points, others are adding data points – like fund classifications or time horizons, said Carr-Pries. Some equities use data points like p/e ratios, while fixed-income products require fewer data points and focus on yields to maturity and changes in credit rating as the primary characteristics. 

Scott Wilkinson, head of Partnerships, Innovation and Business Development for Broadridge Financial Solutions, said there is a danger if the advisor and the firm don’t agree on the most important data points. But Wilkinson noted that helping to define CFRs can present an opportunity to engage with regulators and help them become more effective and efficient.

“I think there’s ample ground for feedback to suggest there should be higher guidance on those scores,” he said. “Just like if you were in an airplane, a one degree difference over four hours can lead you in a different direction and result in some bad things happening…These small increments of data that we’re putting into the sales process have an effect. So therefore, we need to be more thoughtful about what we’re doing.” 

Principles-based regulations 

Carr-Pries said principles-based regulations are somewhat ambiguous, yet at the same time, give firms flexibility. For example: some firms were struggling with what “a reasonable selection of product” actually means. Soon they discovered that products like mutual funds and ETFs are easy to compare – but also require a judgment process.

“Picking a product and making a decision still doesn’t remove the KYC and suitability requirements – that’s really the advisor’s job,” said Carr-Pries. 

He said there is a reasonable range of alternatives based on a set of criteria the dealer and advisors agree to use, writing down why they are using it and how they’re being used. After those procedures are audited and tested, firms will end up with some procedures to follow. 

Wilkinson agreed that the industry is at the start of its CFR journey with different dealers in different stages of adoption. “I think we’re going to see significantly more changes in the daily nuances going forward, particularly as the large organizations move to create efficiencies and predictability across all their channels. Our technologies, by and large, are not quite integrated.”