This is the year when the client-focused reforms (CFRs) finally start taking effect. These changes will apply to all registrants across the securities industry, including IIROC and MFDA dealers and advisors, portfolio managers and other registrants. In this article, I’ll focus on the conflicts of interest provisions, as they take effect first. In future articles, I will take a deeper dive into the impact other areas of the reforms will have on advisors and clients.
The regulators stated that the purpose of these reforms is to better align your interests as an advisor with the interests of clients. This includes improving outcomes for clients and ensuring they understand what they can expect from you in terms of the products and services you provide.
The CFRs are based on the fundamental concept that you should put your client’s interest first when making investment recommendations. While the regulators were careful to say that this is not a fiduciary standard, it is nevertheless a higher standard than today’s. Most clients already believe that their advisors are required to act in their best interest, rather than adhering to a lesser suitability standard. If a “client first” mindset aligns with how you’re already committed to servicing your clients, then these new reforms will simply take accountability and the visibility of your efforts to the next level.
Here are some key areas the regulations will affect:
Conflicts of interest
- The first requirements that come into force will be on June 30 around conflicts of interest.
- There is a new requirement for advisors and firms to address material conflicts in the client’s best interest or avoid them altogether. Firms are required to identify, manage and disclose material conflicts, including those related to proprietary products and to compensation or sales incentives.
- You should also be prepared for clients to receive a disclosure message from your firm about conflicts, and some may ask you about it.
Enhanced KYC, KYP and suitability
- The regulators are further raising the bar on KYC, KYP and suitability. They clarify that they expect KYC information collection to be a meaningful interaction with the client. As of December 31, 2021, you’ll need to start collecting information to establish a client’s risk profile and keep it current enough to support the enhanced suitability obligations.
- Advisors are required to improve their product knowledge, awareness of product changes and understanding of the impact of product costs on returns.
- You’ll also be required to prove that you put the client’s interest first when making a suitability determination, and that you considered “a reasonable range of alternatives” before making your recommendation.
Expanded relationship disclosure
- There are new requirements for expanded disclosure, including clarification around the terms of the relationship with clients.
- You must let your client know anything they might consider important about their relationship with you.
Avoiding misleading communications
- The new regulations prohibit you from “holding yourself out” in a way that may mislead, confuse or even deceive your clients. This includes limits on the titles and designations you can use to describe the services you offer.
While most of these requirements come into effect at the end of this year, many firms will choose to implement some or all changes earlier. Be sure to find out when these changes are coming your way.
As I’ve maintained for many years now, transparency builds trust. The CFRs provide an opportunity to not only comply with the regulations, but also to achieve the regulators’ goal of protecting investors by having transparent and informative conversations. In the process, you’ll reinforce your value and strengthen relationships with clients.
How to talk about conflicts of interest
Since the conflicts of interest reforms are the first to take effect in June, here are some key points to help you have a discussion with your clients about conflicts while demonstrating your commitment to improving client outcomes.
Conversation points:
- If the client is seeing disclosure, it’s because of new regulatory requirements that require this disclosure.
- It’s always important to you to put the client’s interest first.
- If you face a material conflict of interest, you must address it in the client’s best interest and disclose it. If you can’t address the conflict in the client’s best interest, you’re expected to avoid it.
- Avoid providing the laundry list of conflicts that your firm faces. Instead, explain any conflicts of interest you or your firm have that are relevant to the client in a way that’s specific, clear and meaningful to them.