Client Focused Reforms: Putting Clients First

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By iA Private Wealth, April 25, 2022

Finding an Investment Advisor who provides unbiased, professional advice is foundational to a successful relationship. Securities regulators recognize this important aspect of the investor experience and continue to enhance regulations that focus on building trust.

Over the years, improved disclosure, reporting and fee transparency have refined the overall client experience. In 2021, Client Focused Reforms (CFRs) were introduced to help ensure that clients are the top priority in a client-advisor relationship. As the Canadian Securities Administrators (CSA) continues to implement new rules that put clients’ best interests first, we welcome these efforts to uphold a consistent and high standard of care for clients.

Conflicts of interest

Reforms implemented last year require registered dealers and the advisors who work for them to inform their clients of any conflicts of interest that may arise. The CFRs place the onus on dealers and advisors to explain in clear and straightforward language what these conflicts of interest might be and how they will address them in the best interests of their clients.

An example of a potential conflict of interest would be if an advisor is in a position to earn higher compensation for selling a certain type of product, or where the dealer might stand to receive a greater benefit, such as “proprietary” mutual funds managed and operated by the firm.

With the rollout of the CFRs, the advisor needs to prove the chosen product is truly in a client’s best interests and is most appropriate for their particular circumstances – even if a similar, lower-cost solution is available. The advisor must document this discussion and any decisions emanating from it, with justification as to why the recommended product is most appropriate. Many advisors have already been doing this in their practice, but now there’s a universal framework to formalize the process.

Suitability of investments

Advisors continue to be responsible for determining if an investment is suitable for a given client, and the CFRs help them accomplish this important task. The advisor can gain greater insights into each client through an enhanced Know Your Client (KYC) document. An advisor uses the KYC to gather an expanded range of information about a client’s financial situation, risk tolerance, time horizon and investment objectives, while making a reasonable effort to keep the KYC updated in a timely manner as a client’s circumstances change.

Also, the Know Your Product (KYP) requirement ensures that advisors maintain strong knowledge of any securities they recommend and buy/sell on behalf of their clients. Factoring into an advisor’s recommendation is the robust understanding of a product’s primary characteristics, risk potential and total costs (and how, over time, those costs may impact a client’s return on investment). The dealer firm is required to implement specific procedures and controls to properly assess and monitor any investment security available to clients.

Enhanced disclosures

Upon opening a client account, dealers and advisors must deliver enhanced information to give clients a sound understanding of their overall offering. This information includes disclosing which products and services might be available (or unavailable) to the client, how advisors are compensated, what types of costs the client may incur through their ongoing relationship, and what specific responsibilities the dealer and advisor have when serving clients and managing their accounts.

The measures contained within the CFRs help to educate clients, inform their investment decisions and keep their interests at the forefront. While it involves additional time and effort for the dealer and advisor, there isn’t any action required on the part of the investor. For iA Private Wealth, the CFRs are a welcome development as they reaffirm our longstanding commitment to meeting the highest standards of integrity, transparency and professionalism.

We’re proud to focus on our clients’ best interests as we help them achieve their financial goals. If you have any questions about these changes, reach out to your advisor directly or contact us today.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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By iA Private Wealth, October 1, 2024 Building wealth is essential when trying to reach important financial goals, be it funding a child’s education, buying a home or enjoying a comfortable and meaningful retirement. Working with an investment advisor is often a good way to save more money, achieve greater tax efficiency and grow long-term wealth through investing. However, investing for the future can be highly complex and typically requires specialized skills, experience and discipline to succeed. The same applies to retirement and estate planning, which is why many people seek out professional advice. If you’re working with an investment advisor (or considering it), you should understand how advisors are compensated. The topic of fees can be complicated, but we’ll stick to the basics. There are three main forms of advisor compensation: a commission-based model, a fee-based model or by salary. Commission-based. Advisors working in this structure receive compensation when their clients buy or sell an investment (e.g., mutual funds, exchange-traded funds or stocks). The commission they earn may depend on the investment type, the dollar value of a trade or other variables. Advisors may also receive ongoing compensation from fund companies in relation to the funds their clients hold (more on that later). Fee-based. Advisors working in this structure earn a fee that’s based on the value of assets they manage on a client’s behalf. Even if a client makes many trades and frequently uses certain advisory services, the fee charged remains a prearranged percentage (e.g., 1%) of the value of assets being managed. Sometimes the fee percentage declines as a client’s assets increase. Salary. An advisor working for a bank or credit union will often earn an annual salary plus a performance-based bonus. Salaried advisors provide value to clients but may not hold the same industry licencing as commission- or fee-based advisors, which may narrow the range of services they can offer. Management expense ratio (MER) If you invest in mutual funds, segregated funds or exchange-traded funds, you’ve likely heard about MERs. They’re calculated as a percentage (e.g., 2%) of fund assets and are deducted from the value of your investment. MERs are used to compensate fund managers and dealers, and to pay related taxes. Fund manager. This is the firm that operates the fund you invest in. They set the fund’s strategy and objectives, and employ portfolio managers who decide what (and when) to buy and sell, in order to help enhance fund returns and manage risk. They also handle administrative duties like recordkeeping, as well as legal, accounting, audit and custodial services. For these important duties, fund managers earn a portion of the MER. Dealer. This is the firm where your advisor is registered. Dealers maintain account records, produce and deliver account statements, and provide the technology for online account access. Dealers also ensure their investment advisors meet all regulatory requirements. Part of a dealer’s MER allocation (also called a “trailer fee”) typically goes to the advisors responsible for client-oriented tasks like planning, portfolio construction and monitoring, and trade execution. Taxes. A portion of the MER is used to cover federal and provincial taxes charged on fees and services related to the fund manager and dealer. Client Relationship Model 2 (CRM2) In 2009, CRM1 was introduced as a way to standardize written disclosure requirements for dealers industrywide, to help clients understand key relationship issues like the way dealers determine product suitability, how they address compensation matters and potential conflicts of interest, what dispute resolution process they follow, etc. Building upon CRM1 and implemented in 2017, CRM2 obliges dealers to provide clients with a personalized annual report that summarizes charges and compensation related to a client’s account. This report is designed to be transparent and is written in straightforward language. For a better understanding of fees (e.g., what you pay and where the fees go), check your personalized annual report. In the years to come, CRM3 will take effect and provide even fuller investment fund disclosure. For instance, annual total-cost reporting requirements will disclose all embedded costs of owning funds, including MERs and TERs (i.e., trading expense ratios), to offer investors greater clarity regarding the expenses incurred as part of the investing process. Good advisors earn their compensation by providing significant value to clients. To learn more about the costs of investing and the benefits of professional advice, speak with an iA Private Wealth Investment Advisor.
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It’s Year-end: How Will You Manage Your Expenses?

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