How a strategic view to regulatory reforms can help wealth advisors

Co-authored by Adeline Cheng, Tannor Pilatzke and Swati Cavale

With regulations being constantly reformed, wealth advisors must proactively adapt and adopt new ways of working.

The Canadian wealth landscape has seen significant regulatory reform in the last decade, largely focused on increased disclosures to investors. Notable examples include the Client Relationship Model 2 (CRM2), Point of Sale Stage 3 (POS3) and the latest client-focused reforms (CFRs) that come into effect at the end of 2021.

The CFRs, which include enhanced know-your-client (KYC) and know-your-product (KYP), mark a shift in focus from fee transparency to increased suitability requirements. The industry has responded, and the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) have incorporated the reforms into their respective policies.

Heated cross-industry debates among large banks have occurred around how to best comply with the KYP reforms, which has resulted in some firms moving to offer only in-house products to mitigate risk. It appears further debate is on the horizon, as the Canadian Securities Administrators (CSA) has come out against these moves.

Looking ahead, the investment industry may undergo further change with plans for a consolidated self-regulatory organization (SRO), which is on track for launch in the second half of 2022. While this pending merger of the IIROC and the MFDA, so soon after the CFRs, spells a sea change for the industry, it also provides opportunities for firms to apply a strategic lens to accelerate digitization efforts and rethink their operating model.

Transforming for the digital age

The new regulations over the past decade have substantially increased the volume of information exchanged between advisors and clients, which in many cases has been documented on paper or static forms that contain unstructured or non-mineable data. Firms have looked to digital solutions to streamline compliance tasks for the advisor, enhance branch supervision and simplify the client experience.

The proof-of-suitability requirements from the latest CFRs will continue to drive firms towards digital solutions to provide a centralized view of records and accelerate the shift away from paper-based documentation.

Digitization of documents through enterprise CRM tools and digital advice platforms can facilitate recordkeeping, enhance branch reviews, and reduce the administrative burden associated with compliance tasks. For example, the stay-at-home orders during COVID-19 impeded the planned execution of branch audits due to firms’ reliance on paper-based records. Fully digital records and processes would have enabled audits to be completed remotely from anywhere.

These digitization efforts can also further streamline and standardize the onboarding process, removing variability from client to client through a consistent approach, while meeting the CFR requirements. The data gathered digitally also provides new avenues for analytics and insights that can be used to present appropriate opportunities for a client’s portfolio that meet their investment policy statement.

For example, the next best action (NBA) can be determined through digital data tracking in the CRM, prompting opportunities such as insurance gaps that may have been missed previously, which allows the advisor to bring the full strength of the firm’s capabilities to address clients’ needs.

Digital is also driving client sentiment. Clients are demanding greater personalization in recommendations and are willing to disclose more information in return. In the 2021 EY Global Wealth Research Report, 71% of wealth management clients said they were more willing to share personal data with their primary wealth manager than with their doctors.

The CFRs support this data-gathering by requiring routine communication to capture clients’ life changes and help products remain suitable. Meeting the CFR outreach requirements will be less onerous by increasing interaction choice through digital channels (web, mobile, chat), allowing advisors to go above and beyond annual check-ins and to continue to build trust.

Building trust and strong client-advisor relationships is pivotal to retaining clients through difficult market cycles. Over 70% of investors indicated if they have a well-established relationship with their investment firms they would stay regardless of performance. ¹ Converting that willingness to share into active disclosure requires maintaining client trust and asking the right questions.

There is an opportunity to use regulation as a means of not only complying, but creating value by unlocking insights through data analytics and improving the client onboarding experience. The key to unlocking value rests with digital tools that are available today and represents an opportunity that technology and research companies have been quick to capitalize on.

Both incumbent and new entrants have used their understanding of the added burden imposed by the research and monitoring requirements of the CFRs to introduce purpose-built solutions to ease the requirement efforts.

One vendor has accelerated its purpose-built offering with acquisitions of solution-specific fintechs in recent years. These acquisitions expanded the vendor’s capabilities to offer outcomes-based planning solutions that create risk profiles and score both clients and products for their suitability, while keeping a detailed audit trail.

Another vendor has created a solution dedicated to address the CFRs, where it monitors for product changes, assesses product alternatives, and documents suitability determinations.

Fintechs are finding ways to quantify a client’s risk assessment using proprietary software more efficiently and accurately, which provides a risk score using risk tolerance, risk capacity, portfolio risk, and proposed risk as its criteria.

Funding for these technology solutions has been constrained until recently. Firms are now rethinking what it means to assess a client’s risk tolerance or investment objective using technology. Notable examples of CFR-based solutions that have entered the Canadian marketplace from various vendors are: 

• Proprietary risk-rating algorithms for product risk rating and conducting suitability analysis in real time that includes intelligent alerts and resolution suggestions for compliance teams
• Digital discovery and KYP-related solutions that provide data visualizations to enhance advisor-client conversations and are easily integrated with multiple service providers
• Solutions that primarily focus on needs in the anti-money laundering and trade monitoring space, KYC capture, and case management-related tools and workflows
• Case management tools that can correlate information across multiple internal and external data points (e.g., communications, security risk ratings, trade patterns, advisor concentration testing) to inform investigations and resolve alerts relating to compliance
• Compliance-testing libraries that host thousands of test parameters, which can be selected or customized based on client needs

The intersection of streamlined compliance, clients’ growing digital demands and rapidly evolving technology can help accelerate digitization efforts, reduce risk, and transform the advisor-client relationship.