The client comes first. That, in a nutshell, is the message of the Client Focused Reforms (CFRs) put into place by the Canadian Securities Administrators in 2021. As discretionary portfolio managers, able to buy and sell securities on behalf of our clients, we have always been subject to this principle. Now, the rules have been made more explicit, and new standards have been put in place in the areas that can be broadly defined as:

  • Conflicts of interest – where an advisor’s financial incentives compete with those of the client;
  • Misleading communication – where an advisor’s communication with a client might mislead the client into thinking something that is not the case;
  • Suitability of investment – ensuring that any security purchased is aligned with the goals and risk profile of the client;
  • Documentation – to ensure that the advisor and the client are, quite literally, on the same page.

While all of the above areas have been addressed by existing rules for some time, the CFRs outline in greater detail what steps firms must take for each, and they are much more explicit on the requirement that actions are taken in the client’s best interest. These new rules were a long time in development but should be well received by investors, as they are by us.

The rules that came into effect in the first half of the year were about dealing with any material conflicts of interest the advisor or firm might face in their relationship with clients. In the past, disclosure of these was considered sufficient, however, firms must now take certain steps to mitigate the conflict or eliminate it. At the same time, the CFRs specifically spoke to referral arrangements, requiring much more rigorous monitoring and that firms apply the new standards for conflicts of interest and demonstrate how any referral is in the best interest of the client.

Coming at the end of the year were the rules targeting misleading communication and, at the core of reforms, specific requirements to ensure that any investment recommended was in the client’s best interest. One way clients may have noticed the impact of the rule regarding misleading communication is if their advisor had Vice President in their title. In many cases, this was granted to them in recognition of seniority, not as a result of them actually being officers of the firm. As such, the regulator viewed it as misleading, so titles had to be changed, often to Senior Advisor or Senior Portfolio Manager.

Determining the suitability of any investment or investment strategy for a client has always been a fundamental aspect of an advisor’s role. The CFRs take this to a new level with an increase in the amount of information advisors need to collect from clients to ensure there is a complete understanding of their overall situation. This included going into greater detail than many advisors have in the past on financial matters such as net worth and income, as well as employment and employment history, family situation, investment experience and, of course, what their goals and objectives are for the investments. This information is used to help the advisor determine appetite for risk as well as the capacity to withstand short term losses, which together establish an overall risk profile.

In addition, the CFRs are more explicit on the requirements for researching an investment. These will have the biggest impact on advisors who recommend products such as mutual funds as the sheer number available and the wide range of structures make it a challenge to meet the standard if the universe being considered is too large. This has led, controversially, to some financial institutions limiting the products they recommend to only their proprietary solutions. While understandable, it’s not the outcome the regulators were looking for.

Finally, to ensure the new rules are followed and that advisors remain informed, the regulations have measures requiring ongoing and thorough documentation of all elements of the CFRs and regular training for advisors.

The CFRs have been met with some challenges including push back from clients wondering if the amount of information being collected has become too intrusive or concerning potentially negative outcomes when a firm feels they need to limit the number of investment options to meet more stringent product review requirements, as noted above.

Overall, however, we believe these reforms are a positive step forward for the industry as a whole and, while your advisor will need to ask more questions and gather more information, in the end investors will be much better served.

At Baskin Wealth Management we have, of course, adopted but also embraced the new requirements. The specific changes we have made are outlined in 2 communications sent to our clients in 2021 (linked here) and, while they will not result in any significant change to the way we have always conducted ourselves, we do believe they will further strengthen the relationship we have with our clients.