Technology

Anthony Boright

Anthony Boright, president of InvestorCOM Inc., co-founded the firm in 2010 to address the evolving investor communications and compliance needs of asset managers and investment dealers.

Sending material to clients before they make a decision could help improve disclosure to retail investors, but may complicate advisors’ marketing efforts

By Anthony Boright |

Financial advisors spend much of their time in meetings, emailing, or on the phone in order to serve existing clients and attract new prospects. Many of these marketing communications are informal and advisors have traditionally enjoyed some freedom so long as they adhere to their firm's compliance practices. However, changes to the regulatory disclosure landscape will soon force advisors to second-guess their client interactions and potentially look to technology to streamline their communications processes.

At a recent conference entitled, Does Disclosure Work? hosted by the Capital Markets Institute and the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) at the University of Toronto's Rotman School of Management, the first question posed to the panelists by moderator, Chris Nicholls, chair in corporate finance law at the University of Western Ontario, was, "What single thing would help improve disclosure to retail investors?" Ed Weinstein, panellist and principal with the Brondsbury Group, was the first to respond with, "Send the material to investors by email prior to them making a decision."

Until now, regulatory disclosure to investors has come after the sale of an investment product, and as a result of it having been mandated by the regulators, there has been a clear division between marketing communications and regulatory disclosure. Regulators have long known that investors do not, in fact, read these disclosure documents because the information is difficult for the average investor to understand and regulatory disclosure has always arrived after the investor has made his or her purchase decision, when the information is of even less interest.

But, this is changing. Under the second phase of the client relationship model, advisors now have to provide pre-trade fee disclosure of all mutual fund charges and trailing commissions. This increased pre-trade communication with their clients is now occurring during a time that has traditionally been reserved for marketing activities. With the introduction of Stage 3 of the mutual fund point-of-sale regulation, which is rumored to be announced before yearend and likely to be imposed sometime in 2016, advisors and their dealers will have to deliver the Fund Facts document either at the time the client has made his or her purchase decision, or prior to that.

In other words, this information will be delivered at a time when advisors are engaged in marketing activities to provide their clients and prospects with the salient information necessary to make investment decisions. These changes will be significant for advisors licensed under the Investment Industry Regulatory Organization of Canada especially. That's because unlike their Mutual Fund Dealers Association of Canada-licensed advisors, they have not typically been responsible for delivering some of this disclosure information. Instead, they have relied on dealer systems to distribute the information after the trade and the investment decision has been made.

However, with increasing scrutiny being placed on areas such as suitability, transparency, embedded trailer fees to defend and potential conflicts of interest to avoid, many advisors will be challenged by the need to provide their clients the proper disclosure information while maintaining their other marketing activities. Advisors seeking ways to improve their investor communications while adhering to the new disclosure regime will want to continue their marketing and sales activities unimpeded while delivering the appropriate disclosure documents to clients.

Failure to deliver a marketing package is manageable; however, failure to deliver the appropriate disclosure information before selling a mutual fund and other investments will have a more serious non-compliance impact. Advisors may, in some cases, rely on their dealer's trading system and audit trail to generate the appropriate disclosure documentation immediately before the trade is executed, but some advisors will need communications platforms to deliver the appropriate disclosure documents well ahead of the trade — perhaps by days or weeks — so that their clients have time to digest the information and make an informed decision. These pre-trade disclosure events will be of far greater interest to compliance officers in the future, as they need the confidence that these documents are being delivered to clients amid the marketing communications investors already receive.

As dealers and their advisors seek to reaffirm their value proposition and the value of advice they bring to clients, they will have to look for ways — both before and after a trade — to provide information, recommendations and analysis to investors. Advisors will need communications platforms to do so in a concerted, cost-effective manner and where regulatory disclosure events are required on a pre-trade basis, they need to ensure the information is disseminated in a compliant way. Relying on the advisor's "sent" folder in Outlook for proof of document delivery may be insufficient for the compliance officer. Although the compliance and marketing departments have often been on opposite sides of the table at many firms, they're about to get together as advisors broach pre-sale discussions that impact both departments. Clearly, advisors are going to have to learn to navigate the sometimes muddy waters between their marketing and disclosure activities.