During the latter half of 2021, our team worked with advisors across Canada to help them prepare for the new regulatory reforms. As of December 31, 2021, there are now enhanced requirements for advisors as it relates to the Know-Your-Client and Know-Your-Product suitability, communications and disclosures. As with all major industry changes, advisors had a lot of questions about what these changes mean in practical terms. After answering hundreds of questions on the topic, we have compiled some of the most commonly asked questions to help advisors take further steps to implement these changes. The best practices we have outlined below are designed to be flexible based on your dealers’ policies; however, please ensure that you are satisfying your firms’ rules before implementing any of these ideas.
On Know Your Client
The new rules require me to be aware of any changes to a client’s circumstances as soon as possible. How do I keep up with that?
First, it’s important to communicate the regulatory changes to your clients in a way that makes it clear that these new requirements will benefit them. By ensuring that you have up-to-date knowledge of any changes that may affect their finances (marriage, divorce, major purchases, etc.), you can tweak their financial plans and investments to ensure that they have more accurate goals and projections.
There are two ways to stay up to date with clients. Once you have explained the importance, ask and remind your clients to keep you informed as often as possible. Eventually, they will begin calling you proactively, instead of you reaching out to them. Additionally, let them know that you will be contacting them for semi-annual or quarterly check-ins. Determine the days and times that are usually convenient for them and set up a call rotation for 15 minutes. By checking in and saying hi, you are more likely to learn of any major changes, while also reminding your clients of how much you care.
Some of my clients are very private. What do I do if clients don’t want to disclose their personal and financial circumstances?
Remember that by the time you’ve communicated these changes to your clients, you have already wrapped your head around what needs to be done, while they’re hearing the message for the first time. Be patient and continue to remind them of the benefits that come with increased disclosure. By regularly checking in, they are more likely to open up to you over time. Finally, you can’t force your clients to disclose, however, it is important to document your conversations and their hesitancy to protect yourself and your clients in any case of confusion in the future.
I could spend all day documenting client notes. How can I make this process more efficient?
Consider using templates and agendas to make your life easier. Send an email agenda to your clients prior to the meeting, then afterwards “Reply all” to the email with meeting notes and any follow-up items. By saving that email in your client notes, you have proof of client receipt and what was discussed during the meeting. Alternatively, you can use note templates and populate them after a meeting so that you don’t have to restructure your notes with every client. Ultimately, time management and finding efficiencies are crucial to documentation. Assess where your time is being spent and then make any adjustments to ensure you’re focused on the right activities.
On Know Your Product
What exactly are the regulators looking for in terms of due diligence?
This is probably the most frustrating answer for advisors to hear, but there are no specific requirements around due diligence. What we know for certain is that the regulators want to see that advisors have an up to date and unbiased process around product selection. Regardless of how you pick your products, it’s important that you have your process documented and a reasonable range of alternatives to track alongside your selected product. This ensures that you are aware of other product solutions for your clients. Our recommendation is to have a quarterly or semi-annual review process for your existing product list and identified alternatives, and an annual review process for your dealer’s approved product list. Finally, make sure that you communicate your product selection process to your clients to educate them on the level of care you take when making recommendations.
How do I properly document my due diligence process? Normally, auditors just ask for client notes.
While the regulators may not specifically ask for your process, it’s important that it is always readily available. Create a written process that you and your team follow daily and refer to that process within your client notes. For example, “made tweaks to client portfolio to a lower-risk product as per due diligence process” or, “discussed suggested portfolio changes to client and shared due diligence process.” This way, it is well documented that you have a process in place and readily available should anyone need access to it.
If my dealer has a recommended list, do I need to demonstrate any further due diligence?
While certain dealers may do their own enhanced due diligence and share a list of recommended products to advisors, it does not exclude advisors from doing their own due diligence. It is important for advisors to maintain their own record of research, what alternatives they considered and how they came to their own conclusion on a product. If you feel as though your dealer’s recommendation is an important factor then it should be included in the criteria, but it shouldn’t be the only factor, or preclude advisors from taking initiative to do their own research.
Each of my clients have different circumstances, but the regulators want me to demonstrate a consistent approach to investment management. How do I do both?
This may sound contradictory at first, but the regulators are trying to ensure that the client’s best interests are at the forefront when making recommendations. The first step is solidifying the client’s risk profile, which is the lower of their risk tolerance and risk capacity. It’s important that these are well-documented in your client files and updated regularly. You will also need to make special note of any specific circumstances that may affect how the clients should be invested such as an Employee Share Plan, religious beliefs or any unique preferences. The next thing to do is to create model portfolios based on the most common risk profiles within your client base and assign each client to a model portfolio. The final and most important step is to make any tweaks to the model assigned to each client based on their specific circumstances and document those changes and the rationale behind them. The modelling will create that consistent investment management approach, but the risk profiles and model changes will satisfy the client best interest standard.
Regardless of your concerns around the new Client Focused Reforms, it is critical that all advisors understand that these rules are designed to build a stronger advisor-client relationship. These changes are an opportunity for advisors to communicate their value, reinforce trust and foster a more transparent relationship. Embrace these changes and watch how your business thrives.
For more information on how CI Global Asset Management can support you with the new Client Focused Reforms, please contact your CI Sales Team.