Trends that are Reshaping the Delivery of Advice: Regulatory Burden

Jul 23, 2022 | Advisory Solutions, Wealth management trends

Welcome back to our blog series on trends that persist within the wealth management industry. Our second topic is on regulatory burden and how technology can help mitigate risks and drive efficiencies. Our first topic was about the fee-compression trend, which you can read here.

Regulatory burden

Regardless of the direction of the advice industry, the cost to protect the end investor is going up. Over the past two decades, the gauntlet of regulatory requirements has grown significantly. The increase in regulations has been in response to an uneven symmetry in knowledge between novice investors searching for advice and the wealth management professionals providing that advice. While investor protection is at the heart of regulations, expanding the burden carries costs.

The main organizations actively shaping and handling advice regulation in Canada are IIROC, the MFDA, the CSF in Quebec, and the securities regulators. The regulatory direction adopted in other countries typically becomes a testbed for what happens here. Take, for example, disclosure requirements. Following the aftershocks of the 2008 crisis, disclosures became the centrepiece of compliance reforms, with regulators in the EU, U.S., and Canada focusing their attention on fee disclosures, conflicts of interest, and reasons for investment recommendations. In Europe, the Markets in Financial Instruments Directive (MiFID) standardized regulatory disclosures for firms operating in the European Union in 2007; MiFID II then replaced it in 2018. In the United States, Regulation Best Interest (Reg BI), a standard of conduct also based on investor disclosure, went into effect in June 2020. In Canada, the Client Relationship Model (CRM2) and the client-focused reforms (CFRs) are the most recent examples of large-scale disclosure reforms. CRM2 was delivered in phases but fully implemented in July 2017, while all the CFRs were in place by the end of December 2021. Within the CFRs are new know-your-product (KYP) requirements, which, in the eyes of some firms, have made it indubitably harder for their advisors to rationalize their investment recommendations. Consequently, these firms narrowed their product shelves, leaving fewer investment choices for advisors to discuss with clients.

In an ever-increasing regulatory environment, dealer firms will have to confront the inexorably rising costs of compliance and put in place the systems to help them efficiently overcome regulatory demands while delivering a seamless experience that clients have come to expect. Today, clients enjoy accessing their accounts via digital platforms and connecting with their advisor over the phone, through video conferencing, or in-person for information. So, are there solutions to help firms and advisors comply with their regulatory obligations but that don’t add friction to the client experience? Fortunately, there are and, just as with fee trends, they focus on technology and the ability of firms to scale the digital experience.

Technology advancements have helped mitigate compliance risks and drive regulatory efficiencies, especially at the mid-office level. For example, regulatory technology (regtech) solutions can be used to automate and reduce the costs of many reporting tasks that firms may be performing manually, such as compliance monitoring, risk management, fraud management, regulatory reporting, and AML controls. Regtech can also help firms stay up to date on changing regulations. In addition to these improvements, a gradual shift could emerge in the way advisors think about investment management. Rather than focus on product-based advice only then to be asked to defend product recommendations, advisors may instead choose to run a technology-enabled managed-money platform where they outsource security selection to professional money managers and prioritize their advisory efforts on offering premium services such as tax, estate, and philanthropic planning. A managed-money platform allows advisors to scale their business using only managed-money products like mutual funds, ETFs, and SMAs that can run the gamut from low risk to high risk and from basic to advanced investment strategies. Picking individual securities is time-consuming; it’s also an activity that’s difficult for an advisor to scale. The trade-off for giving up commission revenue may be worth the price in terms of time gained to spend on business-building activities. Running a managed-money model can also be done in a hybrid fashion. Advice is provided systematically, and clients can see the value they’re getting from their advisor.

So far, we have discussed two trends that continue to redefine the role of advisors. Coming soon will be part three of this series, where we’ll talk about the role that digital innovation plays on an advisory practice. To learn more about what we do, please contact us.