The next wave of regulatory requirements link together KYC, KYP, and KYA

A lot has been written about the creation of client best interest principles or fiduciary responsibilities in the Canadian jurisdiction. While, similar to the USA, implementation in Canada has been delayed, the market can anticipate some sort of CRM3 wave sooner rather than later (as of writing this piece, the exact scope of the targeted reforms are still being debated).

It remains to be seen how many of the upcoming changes will be driven by regulators and how many will be driven by firms and advisors using client best interest as a genuine value proposition that will make their service offer better than others. Regardless of the motivations behind the changes, dealers and advisors will see major ramifications when moving to a client best interest model. A few of these are highlighted below:

Expanding the Product Shelf

The ability to offer a wide range of products (i.e. active, passive low cost, term deposits) on a single platform in order to use what is best for a given client at a given time is stronger under a client best interest model. This also implies making strong progress in the KYP field, including perfect product data.

Deeper Client Discovery

To deliver well on client best interest, it is apparent that the industry must take the KYC concept to a new level, where frequent portfolio adjustments are required and a strong emphasis on goal-based investing and goal-tracking will drive suitability.

More Accountability in Client Reporting

Transparency is key to client best interest. Firms will have to not only share IPS, Fund Facts or portfolio construction decisions, but also demonstrate that all actions taken—such as opening new account types, modifying allocations, placing trades, etc.—are only with the client’s best interest in mind. As such, the ability to deliver insights on a client’s portfolio and justify every decision surfaces as a primary requirement.

There is no question that these reforms will require a fair amount of educative material for investors to appreciate the relevance of every decision made on their behalf or recommended to them. It is also imperative that all decisions are supported by accountable algorithms, which can prove that each decision has been computed without bias (given shared data by the investors) and with impeccable accuracy.

Given all of the above, are you ready for client best interest?