Transcending compliance in the face of the CFRs

Wealth industry leader at IPC explains how alternative investments, ESG, and technology must be integrated under new regime

Transcending compliance in the face of the CFRs

For households, businesses, and economies the world over, 2021 will be a time of uncertain transition. After 12 months spent facing an invisible yet very real threat, the speed and scope of two counterbalancing developments – the rollout of COVID-19 vaccines on one hand, and the spread of new virus variants in the other – may very well spell the difference between humanity overcoming the virus and simply learning to live with it.

Canada’s wealth management industry is also watching for clouds of change on a second front as the long-awaited client-focused reforms (CFRs) from the Canadian Securities Administrators (CSA) are set to take effect this year. Just as medical frontliners in many cases will administer COVID-19 vaccines in two doses, the Canadian Securities Administrators (CSA) are implementing the CFRs in two shots, which include the conflict-of-interest amendments in June and the relationship disclosure amendments in December.

“From what we see, the biggest challenge for financial advisors to simplify their product shelf, which is something we’ve been working with our advisors to accomplish,” Sam Febbraro, executive vice president at Investment Planning Counsel, told Wealth Professional. “They have to know every product they offer and why they offer it. And they need to be able to clearly articulate how each product they recommend can meet their client’s needs versus, for example, other products in the market.”

Even as daunting know-your-product (KYP) requirements make streamlining an urgent priority, firms are under pressure to broaden their shelves with specialized offerings. As low yields and market volatility reassert themselves throughout financial markets, investors are increasingly broaching the subject of alternative investments in conversations, pushing the onus on advisors to be ready to apprise their clients on the associated costs, liquidity requirements, investment minimums, and other due-diligence items.

For its part, IPC has supported its advisors with a multi-strategy investment offering, through IPC Private Wealth, that encompasses real estate, hedge funds, private equity, and infrastructure. The strategy aims to provide benefits such as enhanced diversification, decreased portfolio volatility, and the potential to capture new sources of long-term returns. But as Febbraro stressed, any recommendation of these types of product must also come with know-your-client (KYC), KYP, and suitability requirements in mind.

“Those considerations will also have to be applied with respect to ESG products,” he said. “Advisors will need to be able to articulate how the ESG principles are applied and show how these can help the client meet their goals.”

To support their advisors’ ability to provide for their clients’ ESG needs, Febbraro said IPC’s asset management subsidiary, Counsel Portfolio Services, adopts a responsible investing approach that ensures the companies it holds aligns with positive ESG expectations. It consists of three pillars: active ownership, which the firm practices through its proxy voting and corporate engagement activities; ESG integration, where IPC ensures its investment managers incorporate the identification, monitoring, and management of ESG risks and opportunities in their investment policies; and exclusion of companies in controversial lines of business such as weapons, tobacco, and coal mining.

“I think at the end of the day, it's having the best of both worlds,” Febbraro said. “We want to help clients create an investment portfolio designed to reach their financial goals and objectives. And as a member of the larger community, we want to invest in companies that are held accountable to certain ethical standards.”

Beyond overhauling their product shelves, Febbraro said firms and advisors must adopt technology to comply with CFR requirements. That’s certainly been helped along by the pandemic crisis, which has supercharged the trend of digitization across the world even as it brought entire industries to a screeching halt. As on-again, off-again lockdowns make digital channels the de facto mode of interaction in daily life, advisors and clients have become aligned in their willingness to change and weave technology holistically into their relationships.

“Based on a survey we did last year called Trends in Wealth Management, we know the pandemic increased investors’ appetite for advice,” Febbraro said. “In that survey, 93% of Canadian investors indicated that it is important to work with an advisor that knows their personal situation. I think that has made lowering the barriers to advice much more crucial.”

It’s not just simple advisor-client communication that technology solutions can help with. Under the CFRs, onboarding and account disclosures will take on added importance. Keeping KYC information updated on an ongoing basis, including a client’s investment objectives, risk tolerance, and financial situation, among other data points, will likewise be essential.

Of course, advisors who have built their practices on continuous education and deep engagement will want to go beyond compliance, which under the CFR regime means having more tools and well-defined systems at their disposal. To elevate the client experience, IPC has developed a ‘Portfolios Your Way’ system to help advisors tailor portfolios according to their clients’ needs. Another program, called ‘Advice Your Way,’ focuses on how clients receive advice – whether it’s face to face, virtually, by phone, or a combination of those options.

“We believe that the firms and advisors who’ll thrive in this environment are the ones that see the client-focused reforms as a positive change,” Febbraro said. “They have to be forward-looking and see how they can benefit from this. At the end of the day, it’s about keeping clients informed, and our view is that an informed client is a good client.”


Follow WP on FacebookLinkedIn and Twitter