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KYP Is Official. Now What?

With requirements under the CFRs officially in effect, Rich Poulin, Director, Intermediary Distribution, Niagara, shares Advisor concerns, questions – and a new tool to help do the heavy lifting, supporting your KYP obligations.

January 2022

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Richard Poulin

Director, Intermediary Distribution, Niagara

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It’s official. You’re now required to understand, and document, the rationale for product recommendations. So, it’ll come as no surprise that in interactions with Advisors, I’ve been having in-depth Know-Your-Product (KYP) conversations, and hearing apprehensions about the potential impact of new obligations on productivity. Addressing some of the recurring themes raised by your peers may help you to navigate change – and even reframe your thinking.

Hot topic for a cold winter

KYP requires you to:

  • Understand products you recommend/purchase/sell
  • Choose from a firm approved shelf
  • Demonstrate consideration of a range of alternatives
  • Document a suitability assessment in plain language

First and foremost is clarity on what KYP rules entail: an understanding of the structure, features, and risks of any investment solution you advocate. Your due diligence will now have to be formalized, and you must be able to show a comparison of the funds you recommend to others in the competitive landscape.

Some Advisors I’ve met with have commented on potential gray areas when it comes to peer group comparisons. For example, a thoughtful question that recently came up is what’s the impact of KYP on a new fund without a performance track record? While an apples-to-apples assessment may seem challenging at times, the CSA requires that you consider a “reasonable range of alternatives”. (Their recently updated FAQ is a helpful resource.)

Going forward, maintaining proper records with meaningful detail will be key for product analysis. Regulators also use the term “reasonable steps,” so it’ll be important that sufficient research has been conducted, and effort taken, to ensure suitability before making a recommendation.

Is a narrow product shelf the answer?

At first blush, some may think that weeding out investments is the simple answer. While contemplating the KYP exercise for every fund you support may have the unintended consequence of narrowing the shelf, there’s a delicate balancing act to consider.

What hasn’t changed is the importance of portfolio diversification and customization based on an individual’s wealth objectives, not to mention investor appetite for ever-increasing choice. While too vast an array begs the question behind reform – do you know your product? – too narrow an offering may result in an inability to address the unique needs of clients across your book.

The fact is, every Advisor is going to have a varying amount of time to spend on regulatory requirements, whether they're doing it all themselves, or it’s being tasked to a designated “KYP expert” on their team. The difference here is scale – larger teams with more dedicated resources could, potentially, hold a broader product shelf than individuals with a finite amount of time for due diligence and administration. What can help to offset this, particularly when it comes to KYP, is the support of dealer firms and product partners.

If you pay peanuts, you get monkeys.

Fit, cost, or performance?

Another hot topic among Advisors is the impetus behind a product recommendation. The dialogue has centred around what should be emphasized both in terms of the rules/documentation – as well as to clients. These conversations invariably lead to the importance of fit over cost and performance. While it’s a must to familiarize yourself with available data surrounding solutions you support, you’ve still got to focus on “the why” for your clients.

For example, a fund doesn’t necessarily have to be THE best performer in every calendar year. You might ask yourself, what were the returns, on average, in an upmarket and downmarket? Did it provide better capital protection if that’s significant to the client? Similarly, a fund doesn’t have to be THE cheapest to be selected from your firm-approved shelf. To borrow from a proverb, sometimes if you pay peanuts, you get monkeys. But is it within its peer group when it comes to fees? If it’s got a slightly higher-than-average MER, are you getting value?

Ultimately, suitability will now be determined on overall portfolio analysis – and it’ll be necessary for Advisors to consider factors such as client objectives, fund structure, features, risk rating, liquidity, and concentration – in addition to the potential and actual impact of costs. (! Best practice: review KYP/suitability assessments on a regular basis, to ensure funds included in your portfolios are still relevant and effective.)

We’ve developed a new KYP tool to simplify the process – preserving more time for your clients and your business building efforts

KYP as an insurance policy

While KYP and suitability compliance may feel onerous – consider the perils of what some Advisors have been doing: storing the rationale for fund selection in their heads. If a regulator were to walk through the door right now, and ask to see research from your decision-making process from three years ago, would you be nervous?

It’s imperative, when it comes to disclosure, that clear evidence be available for an objective outsider to review, because the new rules will be enforced. But rather than look at having to “show the work” as a burden, I want Advisors to walk away from conversations having reframed KYP as protection for their business – like an insurance policy.

You should have confidence that your recommendations are the right fit for clients; be able to dispel any misperceptions, such as fund choice being tied to compensation; and easily demonstrate the competitive landscape considered (from your firm-approved product shelf) to determine suitability. This is fundamental from a regulatory perspective as the intent is to reduce suitability-related complaints – typically the highest in volume. But more than just a defence for a potential future audit, KYP compliance is ultimately in the best interests of your profession, and your clients. Consider how taking them through your due diligence might further engender trust.

A tool to support KYP obligations

What’s clear from the conversations that my colleagues and I are having is that the approach varies from firm to firm; some offer KYP support, while others require Advisors to comply with obligations in their own individual way. Regardless of your situation, we’ve developed a new KYP tool to simplify the process – preserving more time for your clients and your business building efforts.

KYP Made Easy for your BMO Fund Recommendations

  • Summary benefits to highlight during client meetings
  • Customizable peer group comparison
  • KYP Checklist to ensure you meet the new guidelines – consistently

View a sample report for one of our most popular solutions: BMO Concentrated Global Equity Fund >

Given the critical concern of portfolio fit, our KYP resource does some of the heavy lifting for you. Based on a conversation with your BMO Sales Representative, we’ll generate a tailored report – specific to you. It will demonstrate you’ve gone above and beyond the basics to achieve client goals and you’ll be able to print, or digitally save, a copy for record-keeping purposes. The objective is to help you evaluate a range of appropriate comps as required – with key features and metrics including risk, cost, and performance – in one comprehensive document. Beyond an essential to decision-making, it’ll serve as a useful prompt in client meetings and conversations.

Contact your BMO Global Asset Management Regional Sales Rep to discuss our new KYP tool and generate your first tailored report.

Coming Soon: Self-serve, downloadable KYP reports for some of our most popular funds on BMO FUND CENTRAL – your business building resource.

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