The regulatory world is continually shifting, leaving advisors struggling to keep up.
So, a panel of compliance officers at the 2012 Univeris Summit addressed how advisors and institutions are meeting current regulatory challenges. It included: William Donegan, CCO at Scotiabank; Paige Wadden, compliance head at Worldsource; and Martha Kane, VP of compliance at Credential.
The panelists were first asked about leveraging risk, a hot-button topic.
Donegan says advisors aren’t encouraged or trained to do it in today’s market. Over the last three-to-four years, strict regulations have been implemented to ensure leveraging doesn’t harm clients.
Read: 4 things to consider when borrowing to invest
And while many institutions are open to the practice, Wadden reminds advisors to use a solid internal process to make sure it’s suitable.
Kane says the MFDA will audit any investment loan over $100,000. Additionally, advisors are now required to justify any leveraging request using suitability forms and checklists. If any requests are red flagged, they automatically have to be reviewed by a company’s head office.
“Leveraging has a negative connotation in the industry, but if it’s done well, it can be a successful strategy for some clients,” says Wadden.
Read: Faceoff: Is leverage worth the risk?
She says taking out loans for registered accounts and TFSAs happens often, but, in reaction to regulatory pressure, there’s been a major decrease in other leveraging activities.
“Leveraging also creates a training issue, as many advisors have never done it for clients or aren’t familiar with the process anymore,” says Kane.
Another problem is the increasing media coverage about clients who’ve lost money after borrowing to invest, the panel said. Advisors have had clients come in and demand their money back after reading about an investor who was swindled; this trend could result in increasing complaints and claims if precautions aren’t taken.
For firms who do allow leveraging, Wadden suggests they work with regulators to perfect supervisory processes.
Advisors are also wrestling with new cost and performance disclosure requirements, with many firms facing a redesign of their statements. Donegan says this not only involves cost and extra work, but the changes also need to be explained to clients and advisors.
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Kane says her company has started with figuring out what information is crucial, as well as deciding on the best way to calculate all costs and fees. Despite the work, though, she says stricter regulation will push advisors to design a better discovery process and upgrade their services.
“Clear disclosure will [also] help clients see what really went wrong if they’re unhappy with their performance and returns,” she says, which can take the onus off advisors. Investors might realize the market impacted their returns, rather than bad choices by their advisors.
Concerning the ongoing fee versus commission debate, the panel agrees advisors aren’t one-trick ponies; every advisor offers something different, so a fee-for-service model may not apply to everyone.
Read: The advantages of fee-for-service and Advisors need compensation flexibility
Kane has heard talk of an upcoming CSA paper on advisory fee structures, and also hints trailer fees may soon become a thing of the past—regulators fear they cause conflict of interest between advisors and clients.