If you haven’t had compliance training on your firm’s processes to address new know-your-product (KYP) requirements, you likely soon will.
The client-focused reforms (CFRs) related to KYP and compliance training (and those related to know-your-client, suitability and more) will be effective at year’s end. Firms are expected to have policies, procedures and controls to approve and monitor the investments they offer clients, and to provide ongoing training to advisors on how to meet their respective obligations.
Advisor obligations include demonstrating competency on the products you recommend, documenting your recommendations, and recommending only firm-approved products — things you’re likely already adept at.
The KYP reforms reflect “a common-sense reality,” said panellist Rebecca Cowdery, a partner at Borden Ladner Gervais LLP (BLG), speaking at a webinar on Thursday organized by Toronto-based regtech InvestorCOM.
“Advisors can’t be recommending that investors invest in the security that they themselves don’t understand,” she said.
While regulatory concepts related to product due diligence, the monitoring of product shelves, and advisor education have existed for years, the reforms essentially establish formal rules, she said.
That means your firm may require you to follow new processes.
Also, enhanced suitability obligations include assessing the potential and actual impact of costs and liquidity on returns, and considering a reasonable range of product alternatives before making a recommendation.
“There will be serious implications for non-compliance, including … indifferent or casual implementation,” Cowdery said. For firms, “It’s a golden opportunity to review your processes,” she said.
In an InvestorCOM poll to which 87 firms responded, 62% said they were “making great progress” on CFR implementation.
At the same time, they said the most challenging segment of the CFRs was advisor KYP and assessing reasonable alternatives (48% of respondents).
Cowdery said the firms she works with were generally focused on processes, documentation requirements and advisor training.
“Training will be key,” said panellist Michael Taylor, a partner at BLG. “There’s an express training requirement under the CFRs,” so that advisors understand their firms’ processes and requirements for KYP and suitability.
Cowdery suggested firms make their processes easy to comply with, including the process for advisors to document their recommendations.
Further, firms should “follow up in a respectful way with advisors” to ensure processes are followed, she said.
Panellist Richard Wylie, vice-president of investment strategy at Assante Wealth Management, reminded advisors to “show their work” when making a recommendation. Your investment decisions must be clear enough for someone else to review, and be based on comparisons of “objectively similar” products, he said.
Tech can help make those comparisons and ease the burden of documentation; 90% of firms who responded to the poll said they’d use tech to digitize these things.
Most firms also said they’d use tech to help them monitor significant changes across their product shelves. Fund changes can number in the thousands on a single day — there were 3,200 product changes one day this week, said panellist Dave Carr-Pries, vice-president of product and marketing at InvestorCOM — requiring tech to distil significant changes that affect suitability, such as fees and risk.
It then falls to advisors to assess how those changes affect suitability for clients. Advisors’ professional judgment and documentation, in line with firm processes, will be key, Taylor said.