Client Focused Reforms have changed the relationship between advisors and clients. They’ve raised the standards that must be met in order to demonstrate that a proposed financial solution is, in fact, the best choice for the client.
Conducting product comparisons, selecting the most appropriate choice, and documenting that process can be an onerous task for advisors who approach it in an ad hoc or manual manner. On the other hand, advisors who have embraced the best digital technologies- those that support CFR compliance requirements, Know Your Client and Know Your Product reforms, actually have a competitive advantage.
What are Client-Focused Reforms (CFR) and Know Your Client (KYP) Regulations? #
Client-focused Reforms (CFR) regulation took effect in Canada in 2021. The new set of standards govern how firms and advisors determine customer needs, select the best solutions, and serve their clients on an ongoing basis. CFR have significantly raised the standards of client care and prevent advisors from implementing practices that put their own success ahead of their clients’ needs.
Key aspects of CFR regulations include:
- Know Your Product (KYP): Fully understand all aspects of the recommended products’ structure, fees, risks and ongoing costs
- Know Your Client (KYC): Collect and regularly confirm the accuracy of an expanded list of client information
- Suitability determination: Put client interests first. The proposed action must be demonstrably the best choice for the client. Document analysis of a proposed solution’s suitability.
- Relationship disclosure: Disclose conflicts of interest and referrals (and support why they are in the client’s best interest)
- Misleading Communication: Registrants cannot mislead clients about their experience or expertise
Why is it challenging for advisors to achieve and maintain CFR compliance? #
Provisions within the regulations require that client interests come first. Products cannot be recommended without supporting documentation that proves the advisor reviewed all similar products and chose the most suitable. For compliance purposes, advisors need to retain this documentation as a form of defensible audit trail. Failing to meet these standards would create a long-tail risk for advisors and their firms.
That’s good news for consumers. But it can present challenges for some advisors. Those who operate in ad hoc fashion with an assortment of unsuitable tools will, at the very least, spend too much time working to achieve and maintain compliance. At worst, they may find themselves out of compliance and face the consequences.
On the other hand, those who implement a good advisor tech stack that supports streamlined sales and service workflows and makes maintaining CFR and KYP compliance easy will be freed to spend more time on high-value tasks like client review meetings.
CFR suitability determination #
The onus is on the advisor to demonstrate that they have recommended a solution that is in the client’s best interests. This can be one of the most onerous aspects of achieving and demonstrating compliance. It requires advisors to compare a recommended fund against other similar funds, document this comparison, and explain why the chosen solution is the best for the client.
Achieving that suitability standard would be a daunting task if attempted using manual processes or tools that aren’t designed for the purpose.
In fact, a recent joint staff notice published by the Canadian Securities Administrators (CSA) and staff of the Canadian Investment Regulatory Organization (CIRO) examined compliance with conflict of interest (COI) regulation as they relate to CFR.
The report found that most firms were non-compliant in some aspect of COI. In particular, many firms had insufficient or no processes and controls on COI. And there was a lack of ongoing, periodic review of clients’ funds (and comparison against other similar products) to ensure they continue to be in the clients’ best interests.
Advisors need a digital solution that streamlines this process. And, making the shift from manual to digital alone is not enough. Many popular digital solutions enable advisors to pick funds to compare against, but the advisor still has to manually find and select similar funds for comparison.
The best fund comparison solutions automate this process. These solutions, like Equisoft’s Fund Compare, are designed so that when an advisor selects Fund A, the solution automatically finds and compares similar funds. The solution recommends the best option for the client and documents the comparison.
Benefits to the advisor of implementing the best fund comparison tool #
Using a fund comparison tool that enables easy compliance and effective solution presentation not only takes less time and reduces headaches, but it also enables advisors to deliver higher quality solutions to clients with less effort.
Using a good fund comparison solution provides an opportunity to personalize portfolios which helps build trust and longer, more profitable client relationships.
Wrap up #
CFR compliance is not just a regulatory requirement, it’s an opportunity to provide enhanced advice and ultimately build better, longer-lasting relationships with clients. Following good CFR practices should increase trust, make prospects more likely to select you as their advisor, and lead to meeting more of your clients’ needs.
Given the difficulties associated with achieving and proving CFR compliance, advisors should implement digital solutions that automate data collection and fund comparison so that they are freed to spend more time at the highest value task— helping clients reach their goals.