While there’s a natural divergence between what’s required from regulators and what advisors need to do to ensure their practices remain viable and profitable, it appears that this particular set of regulatory changes has garnered a generally positive reaction from advisors.Blue Planet Studio/iStockPhoto / Getty Images
The remainder of the regulatory changes known as the client-focused reforms (CFRs) that centre around know your product (KYP), know your client, and suitability requirements are fast approaching, set to come into effect at the end of the year. Although the principles around the reforms are simple, financial advisors and the dealer firms they represent must shore up processes and technology to meet the new requirements.
That begs the question of whether advisors are ready to step up to the challenge. To help understand the current state of affairs, Morningstar Canada* conducted a survey of 140 advisors across Canada, divided almost equally among bank-owned and independent dealers. Questions were asked around attitudes toward the regulatory reforms, preparedness for compliance, and the perceived impact on an advisory practice.
There’s a natural divergence between what’s required from regulators, and what advisors need to do to ensure their practices remain viable and profitable. Yet, it appears that this particular set of changes has garnered a generally positive reaction from survey participants.
When the advisors were asked whether the changes brought forth by the CFRs were warranted, 51 per cent said they were while only 18 per cent said that the changes were unnecessary. The remainder were neutral.
Most advisors are also not taking the preparation for these reforms lightly. When asked to what extent preparation for the CFRs was required to do their jobs well, almost two-thirds of advisors (65 per cent) said they would need to be prepared moderately or significantly. In contrast, 35 per cent said they don’t need to prepare or don’t need to prepare that much for the CFRs to be able to do their jobs well.
As the central piece of CFRs revolve around making sound recommendations in the client’s best interest, it’s validating to see that the majority of survey participants agree that some preparation is required and that it’s not “business as usual.”
The responsibility of meeting the requirements for the CFRs lies both at the firm level, in the requirement to conduct due diligence on a defined product shelf, as well as with individual advisors, who have their own set of due diligence requirements to meet.
The requirement for additional documentation will surely affect advisors, a fact that’s not lost on them. When asked how the CFRs will affect their regular tasks in the next few years, 60 per cent said either a moderate amount or significantly, while only 11 per cent said there would be no impact at all.
From Morningstar Canada’s regular consultations with industry participants, it’s clear that, for most firms, the largest impact of the rule changes centre around the KYP requirements. Canada’s regulators have not addressed this explicitly until now.
Around this topic, advisors were asked about their perception of the KYP rules; 65 per cent replied that the new requirements are reasonable and don’t change the way that they would make a recommendation. Meanwhile, 29 per cent said their research process would likely need to change.
The CFRs also stipulate that advisors are now only able to make recommendations from their firm’s approved list of securities, which the firm has assessed and is monitoring consistently for changes. Advisors were asked whether this specific requirement will change the way recommendations are made. In turn, 50 per cent of advisors surveyed said their practices wouldn’t be affected at all, 37 per cent said that some client accounts might be affected, while 14 per cent said that they will need to restructure their practices strategically.
Adaption of new technology and procedures is never an easy feat for any business, let alone an advisory practice that needs to meet the unique needs of individual retail investors. Nevertheless, the survey results are an encouraging sign that the majority of advisors are up for the challenge.
*Statistics shared in this article come from the initial findings of a market research survey Morningstar Canada conducted in April and May. A detailed report will be shared this autumn.
Ian Tam, CFA, is director of investment research, Canada, at Morningstar Research Inc. in Toronto.