Investment industry representatives at a roundtable discussion in Toronto voiced concern last week that the best interests of clients could be bogged down in a mire of rules, information overload and paperwork if all of the new "client-focused" reforms surrounding the advisor-client relationship are implemented as proposed.
The three-person panel at the Oct. 24 Morningstar Executive Forum, one of two events held in Canada on the topic of challenges and opportunities for advice givers, included Carol Lynde, president and chief operating officer of Bridgehouse Asset Managers; Greg Pollock, president and chief executive officer of the Financial Advisors Association of Canada (Advocis); and Susan Silma, practice leader, client and industry strategy at PureFacts Financial Solutions, all based in Toronto.
Although the proposed reforms are designed to raise the bar for advisor conduct and improve the client experience, panellists voiced concerns about consequences ranging from higher costs for clients to limited product shelves at firms and less innovation in the industry.
"There is concern that the regulators are creating an incredibly complicated environment, and I'm not sure the proposals would help investors understand the things they need to understand," said Silma, who views the proposals from her perspective as a former regulator and a "recovering lawyer."
At the very least, there are "logistical challenges" in implementing many of the proposals, she said.
The client-focused proposed amendments to National Instrument 31-103 and a companion policy on registrant obligations were unveiled last June by the Canadian Securities Administrators (CSA). Although the proposals stopped short of a statutory best interest standard, they focused on a wide variety of specific reforms relating to what are known in the industry as "know-your-client (KYC)" and "know your product (KYP)" requirements, as well as conflicts of interest, suitability and disclosure.
The public comment period on the proposals ended on Oct. 19. Reactions have been strong and varied, and Morningstar panel moderator Michael Keaveney, director of investment management at Morningstar Associates Inc., told the audience that more than 100 firms, individuals and industry groups took the time to provide written comments to the CSA.
"Advocis believes the fundamental premise and direction of the new rules is wrong," panel member Pollock told the audience. "The focus is all about product regulation instead of advice regulation."
Instead of coming at rule changes from the negative point of view that advisors are "inherently bad," willing to subvert investor interests and prioritize their own business concerns, Pollock said a more helpful and accurate conceptual framework for regulators would be to view advisors as working for the benefit of their clients, with the goal to improve their wealth and save for important life goals such as retirement.
Rather than focusing on cost as the basis for reform, investors would be better served if the reforms focused on professional standards and the quality of financial advice, he suggested. Key prongs within this framework would be advisor education, professional qualifications, ongoing training and a code of conduct, he said.
"At the end of the day the investor must be protected, but we believe there are more effective ways to achieve that goal than outlined in the proposals," Pollock said. "The solution is to create a profession of financial advisors, and to hold advisors responsible for the advice delivered, and when they are off base, discipline effectively."
Many of the CSA's proposed reforms focus on beefing up suitability procedures. For example, new rules for KYP propose that firms analyze and monitor securities and other products they make available to clients, and that they understand how these compare to others in the marketplace. These requirements apply even if the firm deals only in proprietary products.
In terms of suitability, there is an emphasis on an overall portfolio approach rather than individual trades within a client account. In making recommendations, advisors will be required to consider multiple accounts a client may hold.
Under KYC, the reforms are designed to gather more information on the client's personal circumstances, investment knowledge, risk tolerance and time horizon in order to achieve suitable product recommendations.
"Clearly, these are good objectives and it's important to know your client," Pollock said. "But not all clients are the same, and I'm not sure these proposals offer the flexibility that's needed. If we make it too onerous, advisors will focus on the high-net-worth market, as opposed to addressing clients in the mainstream."
Lynde stressed that the personal circumstances of each client are relevant, including physical and mental health, and said there is an obligation for advisors to be on top of any changes. But the KYC must be user-friendly.
"The KYC should be used as an appropriate tool that the client understands and wants to use, so that the products work for the client and fit into an overall portfolio and long-term plan," Lynde said. "We must make it less onerous for clients to get the KYC done. The KYC is not something that the advisor should have to adapt if it doesn't happen to fit with the securities the client is actually invested in."
Lynde added that although products must be suitable to client objectives, the obligation under the proposed KYP reforms for an advisor to know all the securities that make up diversified portfolio products in a client account at any given time is "onerous, and we must be careful about that."
Silma expressed the view that while the "substance" of KYC and KYP is important, there is a danger of "getting tied up into knots by too much paperwork and the compliance process."
"If we can get to a place where we can focus on the substance and not just the administrative box-ticking that will be exacerbated by these proposed reforms, the client will be better off," she said.
She added that disclosure to clients is in danger of becoming overly complex, and that the industry must get away from disclaimers to cover every possibility and concentrate on key concepts. Even with a focus on plain language, "giving the client 40 pages of plain language to read isn't helpful," she said.
"Learning everything about financial products is not high on many clients' lists," Silma said. "They'd rather spend their time researching a better plan for their cell phones. We need to understand what are the key pieces of information the client needs, and present those in a way the client can understand, at the right point in time."
Lynde suggested continuing collaboration between the investment industry and regulators to get to workable solutions and avoid "unintended consequences."
"The devil is in the detail of these new reforms and how we execute them, " Lynde said. "We must take control of the industry away from lawyers and compliance people, and get to what is most helpful for the client."
