- A Morningstar survey conducted in 2021, just before the regulation took effect, showed that 64% of head offices expected the CFRs to require a moderate or significant lift to ensure compliance.
- Under new KYC rules, Canadian advisors must measure client risk tolerance and risk capacity.
- Head offices need to give advisors up-to-date information on product structure, features, and risks in a way that’s easy to consume.
- With strong compliance processes, advisors should have the KYC and KYP information they need to construct a suitable portfolio.
Five Best Practices for Avoiding Know Your Customer Confusion
Read Time: 5 Minutes
The client-focused reforms took effect at the end of 2021. Months later, many Canadian advisory firms still aren’t sure where they stand against the stricter regulations.
If compliance worries are keeping you up at night, you’re not alone.
A Morningstar survey conducted just before the regulation took effect showed that 64% of head offices expected the CFRs to require a moderate or significant lift to ensure compliance. Today, compliance leaders are still trying to standardize processes and train advisors on new requirements while serving clients at full speed.
With the right due diligence tools, you can make compliance second nature across your advisory firm.
Simplify Know Your Customer confusion with Morningstar Advisor Workstation, an all-in-one toolkit to gather and act on client KYC. You’ll create personalised investments that meet regulatory requirements while also building trust with clients.
Table of Contents
1. Understand what motivates clients to invest.
The CFRs put client interests first. When advisors can help clients name meaningful financial goals, it becomes easier to prove that their investment plans align with their actual long-term needs.
Under new KYC rules, advisors have to document information about personal circumstances as background on your risk. Dig into clients’ motivations for investing—what they hope to achieve with their money.
In Advisor Workstation, the Investment Planning Experience organizes productive client conversations about goals. The structured platform walks advisors and clients together through major goal categories, like retirement, education, and bequests. Together, they can discuss initial requirements for time horizons, like target retirement age, and income goals.
Through the platform, advisors can match investor preferences with goal-based plans. The tool connects goal responses to recommended asset mix or model portfolio. From there, advisors can select investments to personalize the plan and help clients cross the finish line.
Advisors can set themselves up for success with a convenient questionnaire to collect this information and match it to investment selections.
2. Build proposals with a proven risk profiler.
To confidently meet Know Your Customer requirements, financial advisors must harvest a broader range of information on their clients. The new regulations guide advisors to separate risk tolerance—how clients feel about risk—from risk capacity—how much loss they can afford to measure their clients’ true risk appetite. Client data needs to be documented and regularly updated to show KYC compliance.
As the regulation took effect, 70% of head offices said they need to re-look at or completely reassess RTQ and KYC processes to ensure that both sides of risk are captured.
Advisory firms should choose a questionnaire based on research, not subjective feelings, for accuracy and usefulness. In Advisor Workstation, the risk tolerance questionnaire is based on psychometric research, refined from psychological and statistical insights. In the results, advisors can explain what their answers indicate about risk in financial decisions, disappointments, and their past.
In Workstation, advisors can connect a questionnaire to a recommended asset allocation that you can build on through investment selections.
For KYC best practices, it’s not enough just to send clients a questionnaire. Morningstar’s RTQ flags answer discrepancies so advisors can bring them up in conversation with clients and get an accurate perspective on risk.
3. Know Your Product with independent data.
Canadian investors have about 24,000 mutual fund share classes and 1,000 Canadian domiciled ETFs to choose from. Head offices need to give advisors up-to-date information on product structure, features, and risks in a way that’s easy to consume. (Binders full of spreadsheets probably won’t cut it.)
In Workstation, advisors can easily sift through a wealth of independent Know Your Product research at their fingertips. Advisors can compare key KYP factors in a side-by-side view:
- Structure – Product type, share class.
- Risks – Morningstar overall rating, standard deviation, down-market capture ratio
- Features – Morningstar category.
- Upfront and ongoing costs – Front load percentage, prospectus net expense ratio, deferred fee percentage.
When your head office makes direct product shelf updates, they can sync it to Advisor Workstation, so all advisors have the same timely and accurate information.
How do current client portfolios stack up against suitability standards? In the Due Diligence Module, you can compare investments to identify funds that fall short of your client’s criteria on risk, performance, and fee.
4. Determine suitability with smart screeners.
Suitability builds on KYP and KYC requirements to inform investment selections. With strong compliance processes, advisors should have the information they need to construct a personal portfolio.
In the Due Diligence Module, advisors can filter your product shelf to discover the right opportunity for each client. Screen by criteria like:
- Below-average risk ratings.
- Above-average three-year historical performance.
- Below-average fees.
From there, advisors can screen potential investments on your product shelf by data points like star rating or manager tenure. Advisors can add up to five products in the same Morningstar Global Category to a short list of reasonable alternatives they can evaluate in more detail.
Once advisors review investments side by side, advisors can make an informed decision about what to include in the portfolio.
5. Show compliance with a built-in audit trail.
Firms need an audit-ready due diligence process that advisors will consistently follow. The process needs to be simple enough for advisors’ day-to-day work, but powerful enough to surface investments that will set your firm apart.
In the Due Diligence Module, advisors can easily track a reasonable range of alternatives and document the reasoning behind their choices.
The platform can archive all this information—alternative investments, final selections, the advisor’s rationale—in a built-in audit trail. The platform connects with your internal file systems, so you can download organized metadata that’s ready for regulators. From there, advisors can generate branded client-facing reports to share recommendations.
The Due Diligence Module lowers the hurdles of compliance so advisors can make the CFRs a natural part of their workflow. Advisors can concentrate on the decision-making process, not the background work of documentation.
Say Goodbye to KYC Confusion with Advisor Workstation.
Better serve your clients and save time on compliance processes with a trusted regulatory toolkit. Book your free demo to see risk profiling, investment planning and the due diligence module in action in Advisor Workstation.
All for your clients, all in Advisor Workstation.