New rules around know-your-client (KYC), know-your-product (KYP) and suitability are fast becoming a reality. The Canadian Securities Administrators’ client-focused reforms will go into effect late this year and be implemented over the next two years. While the industry is relieved that some of the more controversial proposals have not been included, it’s clear that these new rules will have a significant impact on dealers and advisors alike.
As its name suggests, this set of reforms aligns with most advisors’ mission to do the best they can for their clients. As an advisor, you can turn these rules into an opportunity. By focusing on how you can integrate them into a positive client experience, you can get ahead of your regulatory obligations while also delivering better outcomes for your clients.
Here are some steps you can take now to grow your business:
The rules clarify the client information that must be collected as part of the KYC process. This includes information that is not directly related to investing (e.g., personal circumstances, and not just financial circumstances). Many dealers and advisors have been collecting those additional details for some time now.
What I found interesting for advisors is the requirement that the “process of collecting and updating a client’s KYC information must amount to a meaningful interaction.”
In other words, it’s not about the KYC forms – those are just evidence that you’ve taken a client through the process. What really matters is the quality of the conversation you have with your client.
If you’re a proactive advisor, this is good news. Talking to your clients about their objectives and goals, as well as their personal and financial circumstances, often results in additional opportunities to help meet their needs.
Tip: Elevate the conversation
- Use the new rules as an opportunity to delve deeper. Try to truly understand your clients’ life situation and priorities so that you can help them clearly articulate their investment objectives.
- Don’t assume clients will understand the KYC questions. Clients may give inconsistent responses to KYC questions if they’re unclear on the question or how to respond. Help them by explaining things in plain language instead of technical terms, and by using supporting examples.
The regulators have, for the first time ever, introduced an express KYP requirement. Dealer firms will have to meet specific obligations before putting any products on their shelf.
Importantly, the rules also include specific obligations for advisors. You must not recommend a security to a client unless you have taken reasonable steps to understand that security, including its structure, features, risks, initial and ongoing costs, and the impact of those costs. You must also have a general understanding of the types of securities that are available through your firm.
The industry will undoubtedly make some decisions about how firms will respond to these requirements over the coming two years. In the meantime, here’s how you can support the enhanced KYP requirements.
Tip: Talk about costs
- Include information about fees in your client conversations. Recent studies show that, while investor understanding of investing costs has improved somewhat since the introduction of CRM2, many investors still do not understand the fees they pay, or the impact of those fees.
- Be transparent about fees. Don’t be afraid to be transparent about your fees – that transparency actually increases client trust. However, try not to be too detailed or use industry terms that may confuse clients. Instead, explain a client’s fees in plain language. Focus on the impact to the client and how these fees affect their returns, rather than on the flow of fees in the background.
The regulators have reaffirmed that suitability is a “fundamental obligation” and “a cornerstone of the registration regime and an extension of the [advisor’s] duty to act fairly, honestly and in good faith.” They also reinforced the broad understanding that suitability cannot be determined without having first complied with KYC and KYP obligations.
However, there’s a new principle which states that a client’s interests are “at the core” of an advisor’s suitability obligations. When there is a range of possible suitable recommendations for the client, the advisor “must put the client’s interest first, ahead of their own interests and any other competing considerations, such as a higher level of remuneration or other incentives.”
Tip: Make suitability personal
- Demonstrate how you put your clients’ interests first. Explain how your recommendations are tailored to align with their unique goals and priorities, both financially and emotionally.
- See the big picture. Demonstrate how suitability applies at a portfolio level to help clients see the big picture and start thinking about their investments more holistically.