Choosing funds for clients? Get ready to show your work

You probably consider several options before recommending investments to your clients. By the end of next year, you’ll be required to prove it.

That’s because the Canadian Securities Administrators’ client-focused reforms (CFRs) will introduce an explicit requirement to consider “a reasonable range of alternatives” before recommending an investment to a client.

That requirement, along with other changes to know-your-product (KYP) and suitability provisions, will take effect at the end of 2021.

“A lot of advisors are going to say, ‘Well, of course we do research and we consider alternatives,’” Dave Carr-Pries, vice-president of product and marketing with Toronto-based InvestorCOM, said in an interview. “But how do you document the things you’ve considered?”

Technology can help.

InvestorCOM, for example, has developed a tech tool for that very purpose: PeerCompare. The tool compares investment funds on a dealer’s shelf to similar alternatives based on cost, risk and return criteria. The software generates a compliance record for every recommendation made, as well as an optional disclosure document for the client. The advisor then makes the final recommendation to the client.

Other technology providers, such as Toronto-based Pascal Financial, also offer software that allows advisors to meet the new CFR requirements. In an email, Howard Atkinson, Pascal’s chief business officer, said the firm’s AI Portfolio Optimizer delivers “a reasonable range” of investment options based on a client’s risk profile, as does the firm’s Portfolio Comparison tool.

Last month, InvestorCOM hosted a virtual roundtable attended by leaders from 16 wealth management firms to discuss strategies for complying with the CFRs.

According to a report InvestorCOM published after the event, 69% of the firms at the roundtable said they plan to use technology to document that their advisors are considering a range of alternatives for their clients.

To date, most investment firms have been focused on preparing for the CFRs’ conflict of interest provisions, which come into effect at the end of June 2021.

But Kelly Vickers, senior policy advisor with the Investment Funds Institute of Canada and co-host of InvestorCOM’s roundtable, said firms are now “ramping up” their planning for complying with new KYP and suitability rules coming into effect at the end of next year.

One of those firms is Industrial Alliance Securities (iA Securities), which was among the 16 firms that participated in the roundtable.

“We do have until the end of 2021, but we wanted to discuss [our] options early to ensure that we find the best solution for the firm and advisors,” said Mandi Epstein, director of regulatory compliance with iA Securities.

Investment dealers will also be required to monitor “material changes” to products on their shelves by the end of 2021 — another challenge technology can help solve.

InvestorCOM’s ShelfMonitor notifies dealers when there are material changes — such as changes to risk ratings and fees — to the mutual funds, ETFs and segregated funds on their shelves. (Pascal’s platform also monitors changes to the risk and cost of investment funds.)

Dealers who attended the roundtable said that ensuring their shelves comply with the new KYP requirements under the CFRs could be a challenge.

“When we asked if firms have a process around assessing and approving products, 100% said yes, which is not a huge surprise,” Carr-Pries said. “But when we said, ‘Do you have a way of documenting or demonstrating that you’re compliant?’ it was 50/50.”

For further findings from InvestorCOM’s CFRs roundtable, see the full report.