Compliance Rules Law Regulation Policy Business Technology concept.

Over the next 18 months, Canadian and U.S. wealth firms will be expected to implement the most significant compliance reforms in decades. The Reg BI (regulation best interest) implementation deadline in the U.S. recently passed on June 30, and client-focused reforms (CFRs) are coming into effect in Canada later in 2021. The two regulations are similar in many respects; both are principles-based, designed to promote the best interest of clients and eliminate advisor conflicts of interest.

While there is often industry opposition to new regulation, many stakeholders view the CFRs and Reg BI as being positive for the industry overall. The concept of putting the client first and acting in their best interest is a common compliance theme for regulators and is broadly supported by dealers and advisors.

Implementing the various aspects of these “best interest” regulations will require a mix of new processes, training and technology. One of the more significant aspects of the CFRs relates to enhanced suitability and KYP requirements. Specifically, the requirement for dealers to monitor investment products on their shelf and for advisors to consider a reasonable range of alternatives will require a mix of process and leading-edge technology solutions.

According to BCG’s Global Wealth 2020 Report, “over the past decade, wealth management providers have faced an unprecedented surge in regulatory requirements and scrutiny. But rather than design an integrated operating model to address these issues, most fell back on ad hoc responses that generated isolated processes, teams, and tools. The result has been a massive spike in costs and a huge administrative burden that has slowed response times, contributed to mounting client frustration, and heightened the risk of error.”

The assumption that compliance is purely a cost centre isn’t necessarily true. As firms evolve into new markets, new products and new partner ventures, their compliance programs must also evolve. Seen in this light, the compliance function can provide measurable returns that justify the investment. Indeed, a strong compliance program can sharpen a company’s competitive edge. When a company’s compliance function is strong and effective, its success often is measured by what doesn’t happen: fines, legal sanctions, lawsuits, negative press, reputational damage, lost business and lost market share.

If we look at a simple CFR ROI model based on the reduction or elimination of client attrition, the math is compelling. According to PriceMetrix, financial advisors lose 10% of their clients on average every year. A CFA Institute/Edelman study reported that the top reasons clients leave their advisors relate to trust: “Strong performance alone is not enough for investment management professionals to earn investors’ trust.”

In addition, the survey found that investors value and expect certain behaviours from their financial services professionals: to work under formal ethical codes or professional standards; to be transparent about all things, including business practices, fees and potential conflicts of interest; and to act responsibly during an issue or crisis. Investors care that their interests are promoted and want those interests to come before those of the financial professionals and their firms. The objectives of the CFRs and Reg BI are designed to address these very issues. Effective CFR compliance will position dealers and advisors to avoid or reduce client departure risk.

A recent Kitces Research survey of more than 800 financial advisors found that the average total cost for a financial advisor to acquire or replace a new client is $3,119. Considering the widely accepted rule of thumb that acquiring a client is five times more expensive than maintaining existing clients, a $600 annual investment in advisor technology to support best-interest compliance is justified by protecting just one client. The additional benefits that accrue to the dealer through enhanced supervision and digital transformation make this compliance investment even more compelling!