After progress on proficiency and KYP, industry must maintain positive momentum
With the proficiency and know-your-product requirements for liquid alts now firmly established for advisors across Canada, dealer firms have a greater responsibility than ever to review their shelves and provide training around alternative mutual funds, according to one of the leaders at one of Canada’s top independent dealer firms.
“We've always had a robust KYP process to approve liquid alternative products,” said Richard Rizi, Vice President, Investment Services at Worldsource Wealth Management. “I’ve made my living reading prospectuses and offering documents for over a decade at this firm, and we document every product that we make available on our advisors’ shelf.”
Aside from doing their proper due diligence on alternative mutual funds, Rizi says Worldsource has long embraced the importance of product training and education. Even in fall 2018 – long before the Canadian Securities Administrators (CSA) introduced blanket orders opening liquid-alt bridge courses for mutual fund advisors – the firm has made a point of educating advisors on the proficiency requirements they’d need to fulfill to offer liquid alternatives to clients.
“We knew that all advisors, whether they’re with the Investment Industry Regulatory Organization of Canada (IIROC) or the Mutual Fund Dealers Association of Canada (MFDA) would be hearing about these new strategies that they could use with their clients,” Rizi says. “We wanted to make sure everybody was aware of what these new mandates allowed funds to do versus traditional mutual funds, as well as what the proficiency requirements were for advisors, as well as their branch managers, in order to sell them.”
While IIROC-licensed advisors were immediately able to recommend alternative mutual funds to clients, it would be another one-and-a-half years before proficiency requirements were updated to enable all securities-licensed advisors to offer them. While some might have felt it was a long wait, Rizi says the regulators struck the proper balance between listening to the industry and making sure they got things right.
“If you look at the history of liquid alternatives in Canada, a lot has happened since the fall of 2018,” he says. “The industry did a good job of taking what used to be commodity pools and turning them into alternative structures which could be offered under NI 81-102. I think regulators also did well by allowing strategies that had historically been available to accredited investors to be offered to traditional retail investors.”
As an independent dealer firm, Worldsource believes in the importance of product choice for advisors and investors alike. While it includes proprietary products on its shelf, it never had any incentives in place for advisors to recommend them over others.
“We believe that our proprietary products should stand up on their own and compare well to all other products that are in the same space. And if an advisor wants to buy them, that's great,” Rizi says. “And if they don't, they have a lot of choice that is available to them. That is the central thesis of our model.”
Now that the regulators have clarified their expectations on proficiency, Rizi says both dealers and advisors now have to educate themselves on the products, with dealer firms taking responsibility for product training. That has become an absolute necessity in light of the new KYP requirements introduced under the client-focused reforms.
“We have to make sure we're approving the right types of strategies, ones that will be long-lasting to deliver a positive client experience,” Rizi says. “We’re also going to provide more education to our advisors, and then it’ll be advisors’ responsibility to choose the mandates and strategies that work best with their clients’ portfolios.”
