Client Focused Reforms, Suitability, and Packaged Products

Feb 26, 2020 | Advisory Solutions, Client best interest, Client focused reforms, Customer centricity, ETFs, Technology, WealthTech

New Suitability requirements likely to energize ETFs, PTFs and Mutual Funds

The recent client-focused reforms (CFRs), amendments to National Instrument 31-103,  require advisors and firms to address material conflicts in the best interests of clients and put clients‘ interests first when making suitability determinations

This requirement only could have many ramifications to the overall business model, service offering and systems of both dealers and advisors. There are many ways to interpret the new suitability requirements and certainly many questions until regulators detail the various rules. However, when choosing an investment product, the client’s interests could be of many, sometimes conflicting dimensions, among them:

  • Optimal Risk vs Return ratio: Optimality and suitability are in that case, not the same thing: A product, or portfolio, could very much be suitable, yet not optimal. A very low-risk portfolio, for example, will always pass the “risk” test but not necessarily the clients’ best interest. Everything indicates it will take technology and “accountable algorithms” to address this dimension.
  • MER: Clients invest money to seek a return on investment. There is no question that, all other things being equal, the MER of the product does impact returns. Being active, passive or smart beta strategies, lower-cost options are bound to get a boost from the reforms. ETFs, PTFs, F-Series will receive more attention. Those who do not offer them will likely be at a disadvantage in the CFR era.
  • Limited Product Shelve: It is rarely possible, if not impossible. for individual stocks, bonds or for the “exotic” (futures, derivatives…) products to be in the best interest of a retail client because of the inherent concentration risk. Hence, the suitability requirements of the client-focused reforms could have other ramifications.
    • First, only the packaged products (ETFs, PTFs, Mutual Funds, Seg-Funds) and the traditional GICs and Savings accounts can stay relevant, pertinent or even pass the new Suitability test. Concentration and liquidity risk will remove any other products from considerations. Firms have to be the best at Packaged Products.
    • Second, as a consequence, the SRO advisors and firms belong to will not matter as much anymore. MFDA and IIROC, when it comes to retail wealth management, will be living by a single and same influence: The ability to deliver packaged products in the client’s best interest.

As a summary, the client-focused reforms (CFR) suitability requirements will open 2 new battlefields:

  1. The use of technology to determine and validate client optimal portfolios.
  2. The quest for Best-of-Breed Package Product platforms.

Luckily, we believe that Univeris is the best at both. Thank you for reading.