In response to recent know-your-product (KYP) regulations on both sides of the border, some of the industry has focused on reducing product shelves and in some cases eliminating third-party products altogether. The intent of the new regulations is to ensure that advisors consider a reasonable range of alternatives when making a recommendation. By pruning their product shelves, some dealers believe that meeting their KYP obligations will be simplified. But is this approach the right long-term strategy for the investor, advisor and dealer?
The explosive growth of e-commerce has vastly increased consumer choice, changing our expectations. This new world of expanded choice is now the standard expected by the next generation of consumers. Further, research on optimal choice theory suggests restricting choice can inhibit consumer buying behaviour.
That research also suggests that too much choice can have the same negative effect. Finding the optimal range of products to offer investors is a strategic decision for each wealth firm, and new technology provides a fantastic opportunity to ensure that new regulations don’t impede this decision.
The investment industry offers thousands of products, and it’s understandable that wealth firms may view a new layer of KYP scrutiny as a heavy lift. Many firms have chosen to address this challenge by introducing new KYP processes for their advisors. The challenge with a human or process-driven KYP solution is that the data analysis required is enormous. Regulators expect advisors to consider cost, risk and return when evaluating the alternatives that may be suitable for their clients. In a typical day, an advisor would have to analyze over one million data points to remain compliant. This is simply not a human task.
Regtech firms have tackled this data challenge by delivering highly intuitive product comparison tools that enable an advisor to tick the compliance box in a matter of seconds. Once a peer group of products is determined, the advisor can easily evaluate the reasonable range of alternatives and proceed with a product recommendation or select a more suitable product. Further, this analysis can become a powerful sales disclosure when shared with the client. For every recommendation the advisor makes, a permanent record of the analysis is maintained for compliance surveillance and future regulatory audits. Many advisors have told us that these applications are also a powerful educational tool for themselves to ensure that they’re in fact acting in their clients’ best interests.
At the dealer level, the shelf management process for KYP can also be a heavy lift. The traditional process of analyzing hundreds of data points for thousands of products is often an exercise in spreadsheets, frustration and risk. Technology is now available that enables the product due diligence team to have near-real-time comparisons of all products on the shelf.
For wealth firms that restrict their shelves to proprietary products, these applications provide an important competitive comparison of their products against the universe of products in the market.
This KYP intelligence is available at the fingertips of the advisor, product and compliance teams. While reduced product choice has been an unintended consequence of the KYP regulations, such technology can help reverse the trend.
David Reeve is CEO of InvestorCOM Inc., a compliance technology provider to the wealth management industry.