Client-Focused Reform: What Canadian Advisors Need to Know (2024)

Key Takeaways

• New CFR regulations put clients first. By holding all advisors to a higher standard, the quality of service goes up for all investors.
• In today’s competitive environment, it’s not enough to give great financial advice. Clients want options that feel tailored to them as individuals.
• With good compliance practices, advisors prove their trustworthiness and credibility to potential customers.

At the end of 2021, a stricter set of Know Your Customer (KYC) rules took effect in Canada. The new client-focused reforms (CFR) raised the standard of client care, requiring documentation for each step of the due diligence process.

Months later, many firms and advisors still wonder whether they comply with the rigorous demands of new regulations. Smaller firms might feel daunted by the cost of training advisors on ever-evolving rules.

The client-focused reforms mean more than another pile of paperwork. Firms that embrace CFR guidelines can use them as a framework to personalise portfolios and attract more clients.

This post covers eight steps to win more business with Canadian client-focused reforms.

Table of Contents

• Why advisors should never ignore Know Your Customer (KYC) regulations.
• Know Know Your Customer.
• The benefits of good KYC processes for customers.
• How to get started with Know Your Product (KYP).
• What good customer due diligence looks like.
• How technology can improve KYP processes.
• How advisors can earn a competitive advantage with KYC.
• The future of KYC regulations in Canada.

Though the CFRs are largely principles-based, the updated regulation also lists specific requirements for advisors and firms. Failure to follow the law could lead to stiff fines and reputational damage.

Under Investment Industry Regulatory Organisation of Canada rules, advisors can’t:

• Mischaracterise client information in their records to back up an unsuitable recommendation.
• Fail to document suitability analysis.
• Reverse-engineer a suitability determination to fit a recommendation.
• Fail to put client interests first.

Some financial advisors might feel like new rules form a roadblock that takes time away from their day-to-day work. But by taking the time to get to know clients, advisors can improve how they do business.

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Under KYC regulations, advisors collect information on client circ*mstances that can help customise portfolios. This includes data points like:

• Family situations. How might they affect a client’s risk capacity and investment time horizons? Do clients have children who hope to go to college? Are they the primary breadwinner?
• Annual income and employment status.
• Liquidity needs. If clients need cash for a major purchase, advisors can select different investments than they would for clients with longer-term plans.
• Financial assets and net worth. Understanding the full financial picture can lead to diversified portfolios.
• Risk tolerance.How do clients feel about short-term losses? What risks can they afford to take to reach their financial goals?

Advisors also must capture information about their client’s investment knowledge. How familiar are they with financial markets? Do they fully understand the risks and limitations of investment types?

Meeting KYC regulations is like mining for gems of useful data. With comprehensive information, advisors can champion the goals and values behind client investment decisions.

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New CFR regulations put clients first. By holding all advisors to a higher standard, the quality of service goes up for investors.

KYC processes are all about transparency and personalisation. When you comply with new regulations, you can give better advice—and clients will recognise it.

Use your compliance efforts to clearly explain the logic of investment options and how they support client goals. If a product comes with complex features, like a leveraged ETF, advisors might only recommend it to experienced investors. If a client wants to explore clean-energy funds, advisors can compare the fees and structure of opportunities.

Advisors also have to regularly update KYC information—at least once every three years for most accounts and every 12 months for managed portfolios. With frequent check-ins, advisors can take their client’s pulse, answer questions before they become issues, and nurture a solid relationship.

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Advisors need to Know Your Product to make suitable recommendations.

The KYP rule requires advisors to understand all the securities held by a client or on their product shelf. Advisors must know a product’s structure, features, risks, and costs. If the sheer volume of options feels overwhelming, due diligence tools save time on comparing investments.

KYP gives the customer a clear view into the advisor process, which enhances credibility and encourages engagement.

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Are you recommending portfolios based on client goals and risk tolerance?

One of the biggest shifts in KYC processes is risk profiles. Advisors now must document both risk tolerance (willingness to take on risk) and risk capacity (ability to endure loss). For some firms, this calls for an overhaul of the risk profiling process.

In a Morningstar survey of 142 Canadian advisors, about 30% said their firms stored risk tolerance and risk capacity in different places, making it harder to separate the two risk profiles.

Not all risk tolerance questionnaires are created equal. Without proven tools, measuring risk can become fuzzy and subjective. Psychometric assessments rely on research to build fair and accurate questions.

With an accurate measure of risk tolerance, advisors can steer clients towards their goals through the ups and downs of the market.

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New Know Your Product regulations ask advisors to document a reasonable range of alternatives to investment proposals. For clients with a massive product shelf, this could be an arduous manual task.

The right technology illuminates the pros and cons of investment options. If you want to replace a single investment or adjust a portfolio, Advisor Workstation can automatically pull comparable investments from the same Morningstar category. The platform makes it easy to look at investments side by side to evaluate risk, performance, and fees.

The module also securely stores documentation for a built-in audit trail.

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In today’s competitive environment, it’s not enough to give great financial advice. Like in their personal purchases and online experiences, clients have come to expect personalisation in their portfolio, too. Clients want options that feel tailored to them as individuals. The KYC process is an opportunity to show and prove value for advisors.

Knowing your customer also deepens personal relationships. Advisors can open conversations about their clients’ growing families, their dreams of retirement, or their financial anxieties.

Ultimately, trust can satisfy customers and retain them.

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In the past, Canadian clients faced a broad spectrum of investment advice that sometimes depended on how much they had to invest.

CFR evens the playing field. To put investors first, all advisors must meet the same compliance standards. The client-focused reforms are a reckoning for predatory advisors who rely on misleading marketing or recommend unsuitable investments.

As regulations evolve and expand, the right tools can help advisors stay on top of growing compliance demands. Technology can help automate documentation so advisors can focus on their clients.

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KYC, or Know Your Customer, is more than just another form to fill in. With good compliance practices, advisors prove their trustworthiness and credibility to potential customers.

When customers know they can trust your advice, you can win—and keep—more business in the long run.

The right technology can simplify the behind-the-scenes work of screening investments and documentation to let your expertise shine. Make sure to explore all the options available. Show what your investment advice can do with Advisor Workstation.