a woman looking at her computer

When the Canadian Securities Administrators’ (CSA) client-focused reforms (CFRs) come into effect in 2021, there will be several important changes for advisors and dealers.

The overarching goals of the CFRs are to ensure that advisors prioritize clients’ interests when determining suitability; that they document and disclose the terms of the client-advisor relationship; and, importantly, that they expand product due diligence requirements.

The expanded due diligence requirements include a know-your-product (KYP) assessment to consider a reasonable range of product alternatives when making an investment recommendation.

Let’s consider a typical day in the life of an investment advisor. As part of their range of client activities, an advisor evaluates or makes five investment recommendations each day. This advisor’s dealer has an open architecture product shelf of approximately 35,000 investment fund products.

To meet KYP obligations under CFRs, this advisor must consider a minimum of six data or suitability fields when considering reasonably available alternatives (RAA) including fees, risk, performance, time horizon, share class and fund series. This will require processing over 1,000,000 data points daily (5 recommendations x 35,000 products x 6 suitability points).

Every industry faces enormous challenges in converting this growing volume of data into actionable insights. The wealth industry, already awash in data, is at the forefront of this data explosion. Looking at the KYP challenge outlined above, there are two strategies to tackle this new regulatory challenge: introduce new manual processes or leverage technology.

Several major dealers have implemented new processes that require their advisors to document their RAA analysis. One dealer has a 48-hour peer review of each recommendation to ensure that their recommendations are compliant. These manual efforts introduce significant delays in making client recommendations and they are ultimately insufficient in terms of true data analysis.

While the human brain has enormous storage capacity — between 10 and 100 terabytes — the actual capacity for our brains to process information is much slower. Estimates of brain processing capacity is approximately 50 bits or 6 bytes per second. In the simple example cited above, this analysis would take an advisor 5.5 days to complete!

Leveraging technology in this situation reduces both time delay and risk. Product comparison applications that are designed to support RAA generate results in a matter of seconds.

Another vital and often overlooked technology benefit is the recordkeeping of this data. Going back to our KYP advisor example above and extrapolating this data management challenge over a one-year period requires managing 250,000,000 data points. Furthermore, when you consider that dealers might employ thousands of advisors and have a regulatory data retention obligation of seven years…you get the picture.

We outlined the virtues of the hybrid advisor model in several previous articles. Our pending CFR obligations are yet another example of the incredible power of combining technology and human advice. Let technology do what no human is capable of — processing millions of data points instantaneously — while humans do what no technology is capable of: building client relationships based on human understanding, empathy and optimism.