How dealer is staying ahead of the curve when it comes to CFRs

Education, technology, and advisors' enthusiasm to learn means firm is ahead of end-of-year deadline

How dealer is staying ahead of the curve when it comes to CFRs

With the launch of the remaining Canadian Securities’ Administrators’ (CSA) new client-focused reforms now just six weeks away, Worldsource Wealth Management (WM) Inc. is planning to be ready to roll by early December.

“We are acutely aware of the December timeline,” Natasa Morfesis, Worldsource’s Vice President of Dealer Compliance, told Wealth Professional. “We have been working diligently over the last year to prepare our advisors through webinars and conference calls. We had the highest level of response and attendance at our webinars in our entire history, which shows us that not only is the dealership anxious to meet regulatory requirements, but our advisors are keen to educate themselves, as well, as to what their future requirements will be.”

Morfesis said the reforms didn’t come as a surprise as Worldsource had been staying abreast of the proposed changes and has been preparing for them for two years. It worked across departments, not just through compliance, and brought its 850 advisors across the country up to speed, while aligning its systems. 

Rich Rizi, Worldsource’s Senior Director of Investment Services, said it grouped the changes into four categories. The first, conflict of interest, went into effect in late June. So, Worldsource addressed the suitability, know your client (KYC), and know your product (KYP) reforms through white papers and well-attended webinars for advisors.

Rizi said while advisors have always been required to understand the products they recommend, there’s never been an explicit rule to do so. Now, they must record the costs of the products they recommend and the impact the costs will have on client’s returns. They must also understand the features and benefits of the products they’re recommending and document why they’re recommending one product over another. 

While it helps when dealers provide the technology for advisors to do the documentation, Rizi said Morningstar reported that 64% of the advisors it surveyed did not have their dealers’ support behind the KYP reforms and their dealers weren’t providing them with tools to help them meet the requirements. Worldsource, meanwhile, partnered with InvestorCOM, which specializes in compliance solutions for KYC. Worldsource’s KYP tool will be available to its advisors by early December, and then it will train them for the rest of the year.

“So, we’re exactly where we should be from a KYP standpoint,” said Rizi.

Rizi said the KYP provisions had some unintended consequences as banks responded that their advisors would no longer have access to third party products. Some dealers also aggressively culled their products.

“That was not the CSA’s intent – to reduce product sales and reduce access to products,” he said, noting that Worldsource didn’t do that. “The CSA’s intent was to basically put clients on a level playing field with advisors with respect to access to information and understanding the products that were being recommended to them.”

Now, dealers’ biggest challenge is mounting the technology that will deal with the enhanced suitability requirement, which Rizi said “will have the biggest long-term impact on advisors practice just because it requires a deeper dive into client’s circumstances than before.”

While the industry has traditionally examined clients’ risk tolerance, the new reforms require advisors to create a risk profile, which must also include a client’s risk capacity, to assess suitability. 

“Our advisors have always been doing suitability,” said Morfesis, noting Worldsource has long provided its advisors with an investor questionnaire, but is now helping them assess risk capacity, though many advisors who’ve been financial planners have been informally doing that. “So, it’s not a new concept for us or our advisors. We’ve been 80% there. The only adjustment we need to make now is capturing capacity. So, we need to work closely with our vendor to adjust our systems to do that.”

Morfesis said Worldsource is a little ahead of the curve, as most dealers probably are. It’s been successful with the roll-out, but recognized the importance of the reforms, “so we put our heads down and worked through it.”

“It was a lot of heavy lifting. These are the biggest reforms to really hit the industry all at once, certainly in the last decade, arguably maybe ever,” said Rizzi. “But, it’s not a one-and-done thing, especially with KYP, as there’ll always be new products being introduced and the dealer is required to provide education and product training on new products. The client-focused reforms are intended for dealers to consistently provide education, training, and tools for their advisors to incorporate into their practices.”