Second Notification Icon
Amid this period of ongoing change, with the potential for continued market volatility, Broadridge stands ready to help you navigate what’s next. Our highest priorities are keeping our associates safe and ensuring our ability to serve our clients. View resources.
Close

The right insights, right now

Access the latest news, analysis and trends impacting your business.

About Broadridge

Article

Client Focused Reforms (CFR)

Compliance moves from after-process to core client service.


And no wonder! Regulation complexity has rocketed over the past decade. From where I stand, I see a high level of fatigue from firms who keep facing cost of change without deriving benefits outside of simply maintaining compliance. To add further grit to the works, client-facing advisors and compliance staffers are separate by responsibility and by technology, not infrequently at odds with each other.

As a result, many firms are downplaying the reality of CFR, seeing the legislation as just another compliance requirement – another impediment to improving advisor and client experience.

How are the CFR regulations different?

Client Focused Reform suggests a way (and generates a starting budget) to begin incorporating compliance infrastructure to improve advisor and client experience. Essentially, seeing compliance as a client benefit, rather than a costly after-the-fact department. Real-time pre-trade and post-trade compliance solutions powered by enterprise KYC and product data will mean faster orders, fewer costly NIGOs, fewer frustrations, happier advisors and noticeably improved customer service.

However, many firms are reacting to CFR by simply looking for new steps/processes to reduce client risk and fee exposure. From this standpoint, it’s a given that processing will continue to operate in silos, regulations will be managed by again adding to the advisor process, and compliance will retain its place as an ever more intrusive afterthought.

Top

What is the alternative route?

All of this misses the fundamental difference, the sea change, of client focused reform, meaning, advice and service that focuses on serving the client:

  1. The onus will now be on the investment firm to prove investment recommendations in the best interest of the client, scrupulously avoiding conflict of interest. This is a move towards the spirit of the law, rather than the letter. It will be difficult, if not unreasonable or impossible, to implement by simply adding to existing cumbersome processes.
  2. Failing to ensure the right decision for the client could result in a liability tail for firms.
  3. Continuing to rely on fragmented, isolated compliance processes will lead to poor client and advisor experience, resulting in ever higher OpEx / lower future revenues.

The only scalable, efficient way for firms to  ensure right decisions are consistently made is through moving to integrated pre-trade, post-trade and KYC compliance solutions.

The good news? The budgeted compliance spend to meet CFR requirements is an excellent place to begin – it’s a journey. In current discussions with forward-looking clients, we look to find a place in the middle ground between front and back office to begin to modernize from, with the goal of investing IT dollars with purpose and sequence to achieve a cross-enterprise client-centric view.

Case study: The pitfalls of silo-driven compliance

Like many Canadians, I have multiple account relationships with one firm. However, at the time of this story, I had a separate account, a previous employer-sponsored group RSP account offering integrated portfolio management solutions.

Here’s how it played out:

  • The mutual funds offered by my employer group plan were not only fee-expensive, but lackluster in performance and objectives. My overall portfolio at the time was also low on US exposure, so I opted to use the modest sums in my group RSP to purchase US funds.
  • Eventually, the firm providing the group plan informed me that my account was outside of their limits for fund concentration. They refused me the ability to buy more. Although I explained my portfolio holdings, they told me their account-level portfolio and compliance solution prevented me from buying more of the mutual fund and US exposed funds in general. (Compliance? Or process-based programming rules gone awry?)
  • Further, I had to liquidate the holdings! ”Compliance imbalance restrictions” prevented any additional fund purchases in the account until the US funds value was reduced to a set percentage. They could see only my account, not my portfolio. Not the client, in essence.
  • Lo and behold, the mutual fund in question had a short-term dip. I was then forced to sell at a lower price for a notional loss to free the account to trade. (Had I been allowed to buy more of the fund I could have dollar-averaged down and made a nice profit on rebound. )
  • Ironically, the mutual fund in question, while US exposed … was in fact a balanced fund. As a result, my true US exposure was about 50% less than the siloed portfolio compliance model indicated. In effect, the tool used by the firm was based on assumptions that were incorrect to the underlying fund product data and my KYC.

Lack of flexibility of the portfolio models and the compliance regime created investment risk for my best interests – although on an account basis the models were seen as compliant. I withdrew my funds from the plan and placed them elsewhere.

Top

CFR liability tail

This small story highlights key elements of the proposed changes, the changes that move CFR away from ‘yet another technical compliance hurdle’ to a requirement for systems that truly, from the ground up, are client-focused. Systems that require: knowledge of the client, attuned product suitability, no conflict of interest, appropriate tools, and proper oversight and controls.

With CFR, the afterthought approach has taken a deadly hit.

This goes beyond advisor activity

The best interest guidelines extend beyond advisor activity.

Both IIROC and MFDA rules make it clear that Client Data, Best Interest, Product and Suitability apply to self-directed clients. They also apply to tools that that advisors use – or that are supplied to the customers to help in decision-making.

For many firms, the tools used to manage budgeting, risk management and income duration are based on assumptions or unproven models. Firms will need to review dated, assumption-based advice tools to  embrace a higher, more accurate, client and product data-based approach.

Conclusion: It’s about integrated and real-time

Firms must implement a client-level data understanding of total client holdings with the firm – making advice decisions and risk decisions based on actual real-time client-level data.

The only scalable, efficient way for firms to address CFR going forward is through integrated pre-trade, post-trade and KYC compliance solutions. This need is only emphasized by the ever-rising technology bar, worldwide and industry-wide, for integrated, client-centred client service.

Contact Us

Welcome back, {firstName lastName}.

Not {firstName}? Clear the form.