Will CSA’s product-related proposals help or hinder advisors?

Whether the CSA’s proposed client-focused reforms (CFRs) give clients robust options for products and advice from traditional advisors—at the same time as the industry is evolving to include fintech players—was debated Tuesday at Advocis’s symposium in Toronto.

Dennis Tew, head of national sales at Franklin Templeton, said the proposals focus on what he calls “super-sized” know-your-client (KYC) and know-your-product (KYP) requirements. An unintended consequence could be that fund companies, firms and advisors limit how many clients they serve and what they offer, he said.

Tew was part of a panel debating the CSA’s proposed reforms that included Neil Gross, president of Component Strategies Consulting, and Debra Foubert, the OSC’s director of compliance and registrant regulation. The CSA proposed amendments to rules concerning KYP, KYC, suitability, conflicts of interest and relationship disclosure in June, with comments due on Oct. 19.

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On KYP in particular, the CFRs propose new requirements for firms and their advisors. The proposals prescribe the steps firms would need to take to understand how all of the products they offer compare with similar offerings in the market, and include direction on how products should be chosen and monitored. The process for advisors includes a requirement to generally understand all of the options available for them to buy, sell or recommend, and to “thoroughly understand” all the products they offer.

Tew said the detailed reforms have been developed as “a response to a poorly defined problem” related to suitability assessment and whether investors understand fees.

Also, there’s “a regulatory preoccupation with cost” that’s evident throughout the targeted reforms and the proposal to ban deferred sales charges (DSCs), he added, saying there’s more to investing than cost.

Funds with DSCs make up no more than 12% of Franklin Templeton’s sales, Tew said, but if such funds are offered based on suitability assessments, he believes they can be a good option for some investors.

Foubert and Gross acknowledged that suitability and disclosure failures are a core issue when it comes to product complaints, versus elevated costs. But Gross, chair of the OSC’s investor advisory panel, said cost is also important to investors. “It’s not a problem to start there,” he said.

Gross also pointed to Canadians’ low levels of financial literacy and need for “high-calibre” advice. The CSA’s proposals aim to leverage current industry best practices so advisors can better meet clients’ expectations and needs, he said.

Foubert added the CSA won’t be “inhibiting professional guidance,” since the cost of a product should only be a deciding factor if “all other things are equal.”

Overall, she said, firms and advisors, under the CFRs, would be better able to compare and offer products based on their deeper product shelf and client knowledge.

While Tew was concerned that firms’ shelves are already being trimmed in response to the proposals, leading to less competition and choice for investors, Foubert was optimistic that products will become more innovative.

All three experts agreed on the need to strictly regulate proprietary product and related conflicts of interest, including the use of incentive programs for such offerings at firms. Going forward, Gross said, only proprietary product shelves that are best-in-class are likely to be used.

The panel—which also discussed issues including advisor titles, the value of advice and the contested proposals tied to referral arrangements—were all clear on one thing: the industry is at a crossroads.

While a separate, harmonized best interest standard isn’t part of CSA’s proposals, the term “client’s interest first” is used throughout. And, if the CFRs prove ineffective, Foubert noted during the panel session that the June CSA document mentions such a standard is not entirely off the table as a way to help the industry evolve to meet clients’ needs.

Gross summarized: “There’s a door labelled clients’ best interest that has opened and, while there are reasons not to walk through, we need to.” There will be practical implementation hurdles and long-term growing pains, he added, but change is “coming organically for investors and the industry, and we need to move into the future.”

Read:

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