Wealthtech thought leader explains how landmark regulatory changes make client-centric data systems an industry imperative
2021 will be a year marked by drastic regulatory changes as the Client Focused Reforms (CFRs) are scheduled to be fully implemented by December. At first glance, many wealth executives will see the CFRs as just one more compliance hurdle, but the reality is far different.
These reforms mean that data and a client-centric view need to be central to the strategy of your investment firm. Compliance must be first and foremost in the investment process and no longer a requirement tacked on at the end.
Data is now king
In a pattern started decades ago, the advisor was the center of the client relationship. Advisors aggregated whatever was required to perform investment recommendations, sales and reporting. Accordingly, wealth firms organized IT, compliance and products to support the advisor. Systems were disparate and isolated; advisors toggled between investment planning, orders, compliance and admin. This is a pain point for the wealth industry, and CFRs will drive towards enhanced digital data aggregation across multiple lines of business, as it is now central to managing the client relationship.
Digital data aggregation enables the increasing automation of advice, compliance, communications and interactions with other client investment and financial solutions. The effective consolidation of data enables analytics and artificial intelligence to drive superior client and advisor experiences. It reduces manual intervention and costs, thereby increasing both firm and advisor revenues.
Firm accountability will increase
CFRs place a higher burden on firms to ensure that clients are being provided the products and advice that are in their best interests rather than their advisor’s. Advisors are still held accountable for their advice and actions, but the new guidance puts a direct onus on the firm for enterprise know-your-client (KYC) and client-centric data gathering and updates, in addition to transparent products, fees and risk disclosures. Firms also have to demonstrate best-interest investment suitability, referral and fee / risk disclosures.
Cost pressures drive scalability
Compliance has always been a paper-generator. Until the ‘90s, back-office staff regularly worked their way through inch-thick stacks of pink or blue slips while phone calls proliferated between credit, compliance, brokers and EAs. When computers arrived on the scene, very little changed – the cumbersome process remained.
It’s evident that this approach is not scalable or cost-efficient. Current estimates of the cost of a Not In Good Order (NIGO) trade hover around $100. With ever-broader competition for every investment dollar and a continual stream of digital solutions being offered by new entrants unencumbered by legacy technology, these NIGO costs are becoming non-sustainable.
The funeral bells are ringing for bolt-on, post-trade compliance.
Client-centric data is now vital
Based on their recent communications, the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada have indicated that client-centric data is vital to wealth management.
While “client-centric” makes sense with today’s customer expectations, it represents a significant, near-radical change in data architecture for the industry. The data that CFRs require to be known corporately, enterprise-wide, is now typically held at the account level with the investment advisor and / or spread across multiple systems and multiple lines of business. At the enterprise level, what’s held is typically only name and address, and the information that determines suitability and helps to decide conflict of interest is not readily available.
As drafted, the CFR guidelines indicate that material changes to KYC information attained in other parts of the enterprise should be factored into in investment KYC and ongoing suitability and portfolio rebalancing decisions. Unless, and until, the right data is held at the enterprise level, investor suitability can’t be decided – much less automated – pre-trade.
Potential knock-on effects
The move to client-centric will have effects on even more than the timing of compliance and the technological integration architecture of wealth firms.
The CFR guidelines suggest a future where mutual funds and ETFs become far more focused, each one less of a complete portfolio in itself.
Building a book may take on a different meaning as well. For today’s advisors, the times of “owning a customer” may be drawing to an end. Firms now own the data and the outputs that drive customer and advisor experience, and the clients themselves increasingly want a direct hand in managing their own combined experience.
Firms may also see new revenue opportunities once an enterprise, client-centered data architecture is in place, the doors opening to driving new efficiency and revenue opportunities through integration, in addition to creating transparency.
Further regulatory changes may also be on the horizon, as there are rumors of major insurance firms thinking of dropping their independent advisors, considering that infrastructure cost of support under the new regime may be too high.
Après-CFR, what is a ‘compliance solution?’
Most Canadians deal with investment firms that are part of a larger financial services enterprise. CFRs have recognized that investment advice and solutions are often integrated with customer holdings across lines of business in the enterprise – and that the future of revenue optimization is driven by increasing the overall relationship with a firm through product holdings.
But traditional compliance offerings tend to deliver a delayed and disjointed experience, subject to reconciliation breaks.
Wealth executives making CFR-related budget decisions would be wise to begin using their compliance budget to move towards an integrated architecture. In essence, pick a place in the middle ground between front and back office and begin to modernize, investing IT dollars with purpose and sequence to achieve a client-centric view.
To avoid increasing their legacy technology, smart wealth firms will be moving to products operating as SAAS/Hosted/ASP, designed to integrate as one package. Such a platform will:
- Elegantly address the requirements of CFRs
- Provide a better advisor and client experience
- Cut costs and create efficiencies
- Offer a sustainable platform that grows to accommodate new needs independent of any individual core system – enabling the pursuit of additional revenue opportunities
- Increase opportunities based on both integration and data analytics
We are in an increasingly digital environment, and this global digitization has created a climate in which online experiences are expected to be sleek, real-time and client-oriented.
Client-Focused Reforms offer wealth firms an opportunity to begin to invest their compliance budget to move towards compelling, client-centered, low-cost and scalable investment experiences across all channels and brands.
Wealth firms who see CFR as a significant opportunity to integrate and automate, simultaneously driving client experience and increased efficiency, will emerge as market leaders.
Darrell Campfield is vice president of strategic solutions at Broadridge Financial Solutions, a leading provider of investor communications and technology-driven solutions to banks, broker-dealers, asset and wealth managers and corporate issuers.