The investment industry has been inundated with new regulations, many of which are forcing financial advisors and their dealers to increase their disclosure when communicating with clients. In most of these cases, advisors have not welcomed the regulatory changes — such as the introduction of point-of-sale (POS) disclosure or the second phase of the client relationship model (CRM2) — because they increase advisors’ workload and force some challenging conversations with clients. But there’s another way advisors should be looking at compliance disclosure.
Benjamin Franklin said that there are only two things that are certain in life: death and taxes. If Franklin were alive today, he might alter this quote for the investment industry, adding compliance as the third certainty. If you assume that compliance is not going to disappear, is there an opportunity to use this to your advantage as an advisor?
Let’s take a quick look at CRM2, which was phased in fully two years ago. Research from the B.C. Securities Commission released last year revealed that knowledge of fees actually declined for almost a third of investors overall between November 2016 and June 2017 even though they had received the CRM2-mandated reports. Although investors received increased disclosure, their knowledge of fee structures did not increase as expected. The risk to the client/advisor relationship is confusion and potential disengagement among clients.
However, we know based on our experience in working with financial services firms and advisors that a proactive conversation on CRM2 between advisors and their clients will yield very different results. By removing the confusion and mystery associated with CRM2 reporting, advisors have the opportunity to create better engagement with their clients.
POS disclosure is another great example of new regulation that could be turned into a win/win for advisors and their clients. The main goal of POS disclosure was to create a standard, templated document that would make it easier for the investor to compare multiple mutual funds. Rather than sifting through a multi-paged prospectus, key information such as “top holdings,” “investment risk” and “performance” is presented in a standard template, common across all investment products.
A secondary goal of POS disclosure, with the introduction of Fund Facts, was to provide this simplified document prior to the purchase of a mutual fund – at the “point of sale.” This new disclosure process has driven significant adoption for electronic delivery. In many cases more than 85% of these documents are being delivered digitally, eliminated the high cost and low client satisfaction associated with a printed prospectus. Advisors who have leveraged this digital solution are offering convenience and simplicity to their clients. As of December, delivery of ETF Facts will be required for all transactions involving ETFs. This is yet another new regulation that creates the opportunity for improved investor engagement — if managed correctly.
In addition, proposed changes to “know your client” (KYC) and “know your product (KYP)” regulations are on the horizon, with the introduction of the Canadian Securities Administrators’ client-focused reforms, which were introduced in June. There are several software programs available for the industry that automate the KYC/KYP process and enable advisors to offer their clients a self-serve model, which has great potential for increased client engagement.
KYC is a natural extension to the planning process and KYP should be an integrated step in the advice journey. Advisors can never be expected to know all products, risk ratings and suitability metrics — but when armed with one of these technology tools, advisors will meet their regulatory requirements and provide improved service to their clients.
Compliance disclosure can be confusing to all parties. But there is an opportunity for advisors to stand above their peers and take a leadership role in removing this confusion for their investors. There are many industry solutions that provide “pain relief” for compliance. Will we ever have the opportunity to transform this process from pain to pleasure? Not likely but there is a middle ground and the winning advisors will help their clients land there.