Client Focused Reforms with Parham Nasseri | E068
Regulatory changes in Canada and what they mean to you.
In today’s episode, Jason and Guest Parham Nasseri is going to discuss a bit different subject. They are going to talk about the implementation of something known as client-focused reforms. This is one of the biggest series of regulatory changes to happen in the investment industry in Canadian history. While the average consumer may not really have an understanding for what’s going to happen or know what was going to change for them. These reforms will change the way your advisor has to operate and actually interact with you.
Episode Highlights:
1.44: Parham Nasseri worked for a company called investorcom, this company is around since 1992. Fundamentally their RMO in the market is to help wealth advisors comply with regulations.
02.00: Jason asks Parham, “Tell us about the client-focused reforms; what is this and where did it come from and what’s to try to accomplish?”
03.10: “Western world modern sort of economies that have a Securities Act and awaited sort of capital markets from around the world they have been trying to increase their attention on reforms that improves investor protection,” says Parham.
04.00: Parham suggests, let’s move forward from just the plain disclosure model and ensure and mandate specific regulations that required investment advisors and wealth management firms to act in their client’s best interest.
04.45: Talking about the imperfections, Parham says regulators aren’t trying to clean up every single run that’s going on in the industry; but what they are trying to do is raise the bar and say - how can we ensure or mandate that the advisor has to act in their clients’ best interests?
07.35: As per Parham, there will always be challenges in the industry and the consumer advocates or investor advocates, and that world is never going to be 100% perfect.
08.21: Parham explains before you make a recommendation for a client, not only does it have to be suitable, but it also actually has to be in their best interest and are qualified in a principled manner.
09.30: Jason says,” The entire industry is based on client trust; it is 100%; without trust, the entire financial history doesn’t exist.”
10:20: In the industry, there’s a delineation between what is truly a financial professional who’s out there trying to act in your best interest, quote-unquote, traditionary versus someone who’s out there just Selling products, says Parham.
12.05: Parham says, post-December of 2021, there is going to be an added level of pressure on firms to act in a more align manner to their clients.
14.00: Jason says, “Risk tolerance according to academia is your ability or your personality around risk. How much are you willing to tolerate risk? But that’s a kind of a personality trait, typically measured by psychometric profiling questionnaires, which most industry uses absolute garbage questionnaires developed by their marketing department and don’t even aren’t even truly calculated properly. But there’s a number of really good and another expanding number of third-party tools that are tested rigorously in academia.”
14.31: Jason inquires, “Without a financial plan testing for someone’s ability to absorb the loss, how is it possible to measure capacity?”
15.20: Jason says, “What is it called wages and our risk profile? How often is that going to be expected to be updated under other new CFCF rules?”
17.00: Jason says, “You all are going to get your financial advisor calling you and saying, hey, tell me what has changed? Tell me what is going on. Tell me about your total assets to liabilities. You’re going to feel like that’s a little bit. The infringement of your privacy or why is this person asking me this again and again, but again the intention behind the regulation is for the financial advisor who is giving you investment recommendations for them to truly know, how your circumstances have changed?”
19.00: Parham recommends, “As a consumer, you should expect your client advisor to be bugging you more for this information on a regular basis. If they’re not and they’re just leaving, you know there is nothing being updated. They’re not living up to their recommended requirements.”
20.10: Parham says, “KYP stands for knowing your product as per the new obligations a firm that you’re dealing with the financial institution working with has some process in place. The individual financial professional has to do some additional diligence around the products that they are making that they are recommending for you in your portfolio. Fundamentally, think about this KYP piece as this gatekeeper function. Under the days where a financial advisor can recommend the product to a client to an investor without the firm knowing what the heck that product is all about, how that product change is that product is in my client’s best interest.”
22.09: Jason says, “The second I read the reform I thought to myself, well, this is going to lead several institutions to basically block anything but proprietary products.”
25.44: Parham and Jason discuss of digitization of processes. They also give detailed insight on the gatekeeping process.
30.07: Parham affirms,” Regulators are now going to firms and saying show me your process for considering a reasonable range of alternatives.”
32.40: Parham says suitability is fundamentally a matching exercise. If your investments are at high risk, then register for it. It is like Lego pieces coming together.
35.39: Jason reiterates, “The reality is where is the thought process methodology? How often should you be able to get all those answers? And frankly, I would encourage any advisor listening to this to get ahead of this and document that for yourself in the next couple of months.”
3 Key Points:
Jason and Parham will talk about the implementation of one of the biggest regulatory changes that will happen in the investment industry in Canadian history.
Jason asks Parham to share his views on the major tentpoles to the client-focused reform.
Gatekeeping functions, KYP process are fundamentally good, and it is going to have a long-term benefit to clients, says Parham
Tweetable Quotes:
“There is always this one world that is ever-expanding in this universe, or one part of the financial industry is ever expanding in this universe – It is compliance.” – Jason
“The client-focused reforms specifically have to be implemented by the end of this year whoever is thinking about them.” - Parham
“I am a big believer that financial advisors and planners should have a fiduciary responsibility to their clients.” – Jason
“The majority of the industry is salespeople; they do not want to be called salespeople, and they want to have the auspice of being a professional.” – Jason
“Capacity is one’s ability to absorb risks.” – Jason
“Most financial professionals are going to have or should have a good idea of what time series ability and willingness to take the risk.” - Parham
“Suitability is fundamentally a matching exercise.” – Parham
Resources Mentioned
Facebook – Jason Pereira’s Facebook
LinkedIn – Jason Pereira’s LinkedIn
Woodgate.com – Sponsor
LinkedIn – Jason Pereira’s LinkedIn
Parham Nasseri: LinkedIn | Investorcom
Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Hello and welcome. Today I'm going to show you Parham Nasseri, VP of Regulatory Strategy and Partnership for InvestorCOM. I brought Parham on the show today for a bit of a different subject, specifically to talk about the implementation of something known as client focused reforms. This is one of the biggest series of regulatory changes to happen in the investment industry in Canadian history. And while the average consumer may not really have an understanding for what's going to happen, or what's going to change for them, these reforms are going to change the way your advisor has to operate, and in turn, actually interact with you. So I brought him on the show to raise awareness of this, such that, you know when dealing with your advisor what to be aware of, what some of these implications are of. And if you're not seeing this level of due diligence, to question why not. Basically, like I said, very important. I brought him on to give us some greater breadth to this.
Jason Pereira: So with that, here's my interview with Parham Nasseri. Parham, thanks for joining me today.
Parham Nasseri: Very nice to be here, Jason. Thank you for having me.
Jason Pereira: My pleasure. Parham, tell us a little bit about what it is you do.
Parham Nasseri: All right. I work for a company by the name of InvestorCom. InvestorCOM has been around since 1992. And fundamentally, our MO in the market is to help wealth and asset managers comply with regulations. We have a fun anecdote saying that we help our clients with their compliance Pain Relief.
Jason Pereira: Well, excellent. There's one world that's ever expanding in this universe, right? One part of the financial industry that's ever expanding in this universe right now, it's compliance. Seeing exponential growth, which is good and bad. It raises cost, but great in that hopefully it protects consumers better. Tell us about these client focus reforms. What is this and where did it come from? And what's it trying to accomplish?
Parham Nasseri: Jason, this is such a timely discussion, because the client focus reforms specifically have to... They have to be implemented by the end of this year, and this year being 2021, whoever's thinking about [crosstalk 00:02:23]-
Jason Pereira: Well this will air this year, don't worry about that. So that's [inaudible 00:02:25] towards the end of the [inaudible 00:02:26].
Parham Nasseri: But the backdrop of this is a little bit important, because securities regulators around the world, and I mean the Western world, modern economies that have the Securities Act, and a weighted capital markets forum. Around the world, they've been trying to increasingly focus their attention on reforms that aim to improve investor protection. If we go back a few years, it was all about disclosure. Make sure that if investor is going to purchase a mutual fund or an ETF, hey, make sure they understand what it is that they're acquiring. What they're investing. Right? As part of that, everybody received a piece of paper that said, hey, here's the cost risks of that particular investment. Was it perfect? Maybe not. Maybe some would argue it is perfect. Some would argue it's overburdensome anyways.
Jason Pereira: [inaudible 00:03:16] it's not, and that it's not fully completed the disclosing all fees on these statements. But let's continue on.
Parham Nasseri: Right, right. Everybody's aware that there are hidden fees. And so, is disclosure the best model, right? But the caveat [inaudible 00:03:29] buyer beware, is that theoretically the best model in a complicated environment, in a complex environment, such as the investment management units, right? Would you go to a doctor and say, "All right, here, I want a painkiller just disclose to me all the different variables." Is a particular investor or patient, are they going to be able to understand the risks, the costs and benefits of partaking the medication? Now, what's been happening across the securities world is, the regulators have said, "All right, let's move forward from just the plain disclosure model, and ensure and mandate specific regulations that require investment advisors and wealth management firms to act in their client's best interest. Okay? That's a really, really bold and audacious new regulatory requirement.
Parham Nasseri: Obviously, again, going back to what Jason mentioned about imperfections. What the regulators aren't trying to do is clean up every single wrong that's going on in the industry. What they're trying to do is raise the bar and say, "Okay, how can we actually ensure or mandate that the advisor has to act in their client's best interest?" Now, if you're thinking about this critically, which I hope you are, the question might pop up in your head. Which is, wait a minute, is my advisor not acting in my best interest today, and now the regulators are going to fire them? And this is why, actually, the regulation
Jason Pereira: [crosstalk 00:05:02] not really, but continue. I'll get to that. I'll go on my [crosstalk 00:05:02].
Parham Nasseri: As you can see, Jason has his particular views on this. [inaudible 00:05:05] you can hear. So the notion of best interest is what was the impetus behind the client focus reform. At which point, the industry pushed back and said, "Hey, client focus reforms, it's about the client. And these new reforms should be focused on the client. Not this best interest principle, because there's a negative connotation with, now that you're saying I have to act in your client's best interest, advisers have to. Which kind of suggests that they weren't. They may not have been before." By contrast, by the way, same set of regulations were also in place in the US [crosstalk 00:05:38]-
Jason Pereira: Let's take a step on that. Okay, hold on. So those same set of regulations, and this is the key, and this is where I get on my pulpit here. I'm a big believer that financial advisors and planners should have a fiduciary responsibility to their clients. That is the single highest standard when it comes to the court of law that says, it's nevermind suitability, nevermind best interest. At all time the client must come first. Right?
Jason Pereira: And the reason why that same regulation came into place in the US was because of a series of interesting rulings, where initially they tried to impose a fiduciary responsibility on the entire industry. Because only a part of it, the RA market, actually had that responsibility. The industry then fought back, big surprise, and there was a giant fight. And the SEC decided to punt the decision and basically came up this other thing called regulation best interest, which basically is not a fiduciary responsibility. Best interest and fiduciary responsible, you might get micro slicing it. Bottom line is, words have power, otherwise people wouldn't be avoiding them. So point being, they basically came up with this. Michael Kitces, a colleague and friend, I will call him a friend, in the US. His organization, that's why PN actually fought this at the court level.
Jason Pereira: And the court actually agreed that the SEC should have done this, but they had no power to stop it. In fact, the guys who wrote the act that the SEC was acting under, said the SEC has no right to do this based on the act we wrote. And there's still a debate, because Biden, in the election, said that he would impose a fiduciary responsibility. We'll see if that happens, there's some hope. But the reality is, is that this is not the highest standard of care for consumers. And frankly, I believe firmly that we should have that. But continue.
Parham Nasseri: Yeah. Yeah. Jason, I think you in a, I think, 30 second tangent, really, really covered off the historical context in the US. But if I could, I'll summarize it this way. I'll say, there's always going to be challenges between the industry and the consumer advocates, or investor advocates. And that world is never going to be 100% perfect. Are we moving in the right direction? In my humble view, I think we are. Right? To just go back to my comment earlier around prior to this client focus reforms implementation, what was truly required was just purely disclosure. Right? Not to say people were out there not acting in their client's best interests, but purely from a regulation perspective it was, hey, buyer beware. I'm recommending this product for your retirement, for your nest egg. Here's the disclosure.
Parham Nasseri: Now we're saying, look, before you make that recommendation with the client focus reforms, what reg BI is trying to do is to say, look, before you made that recommendation for that client, not only does it have to be suitable, it actually has to be in their best interest. And they've codified in a principled manner what needs to be done in order to make those recommendations.
Parham Nasseri: So totally agree with your notion around fiduciary obligations and financial professionals actually acting more as fiduciaries. I think it gets into the, personally, not wearing my firm hat here. I think that gets into a little bit of a legalese [crosstalk 00:08:35]-
Jason Pereira: It does. It does. And this is the thing, if we're going to say that... If law's going to define fiduciary responsibility as the highest level of care that one can have to a party that they are servicing, right? And the industry as a whole is doing... And I've had this debate many times, where, well this isn't going to solve stuff, or whatever it is. They're always going to be with some sort of reply. It's like, look, if this word did not have power, you wouldn't be running from it. And frankly, given that the entire industry is based off of client trust, it is 100%. Without trust the entire financial industry doesn't exist.
Jason Pereira: Given that, and given the fact that if you pulled someone off of the streets in Canada and asked, do you believe that your advisor has to act in your best interest at all times ahead of their own? Their response is either going to be, I don't know. Or, I sure as hell hope so. And if we're living off of this, if we're basically existing off of this, I'm not going to call it a lie, but it's misconception that we are extracting something. We're extracting a trust that we don't deserve through law, and that's not right. Anyway, I'll get down from [crosstalk 00:09:36] pulpit.
Parham Nasseri: Look, you said that, Jason, really, really well. And I think that's the underlying foundation of our industry and the success of our industry. Right? Can you argue against what you said? And if somebody does, and says, yeah, you know what, trust is not important. Right? The foundation [crosstalk 00:09:54]-
Jason Pereira: More often than not it's like, well we're just going to get sued more. It's like, well if you get sued more it's because we did something to justify the being sued. So please tell me why that's a problem.
Parham Nasseri: Right. I think, I mean, this is a little bit off topic from my perspective, but I'd say it is paramount. It is so paramount. And I think that the underpinning issue is, in the industry there's a delineation between what is truly a financial professional who's out there trying to act in your best interests, a "fiduciary". Versus someone who's out there just selling products. Right? Think about a car salesman, or you go to Best Buy and someone's giving you advice. "Hey, you want headphones? Here's a better headphone." Are they going to make more commission off that more expensive headphone? Maybe. That's the distinction between what's happening in the industry [crosstalk 00:10:40].
Jason Pereira: A friend of mine nailed that too. He said basically, here's the real problem. The problem is the industry wants all the salespeople to appear to be advisors. Right? That's the reality of it. And this is part of the problem, this is part of why there's so much pushback on title reform, and people are trying to water it down. It's because the reality is, especially the large institutions out there, especially at various levels of those institutions, they are salespeople. Right? They are salespeople with quotas. And they can deny that they have quotas, but my response is always, "Great, sell nothing for a month and see how that works out for your job." Okay? The second someone can run that experiment and survive, I would be shocked and amazed.
Jason Pereira: Point is, is that the majority of the industry is salespeople. They do not want to be called salespeople. And they want to have the auspice of being a professional. But the reality is, is that that's not the case. And unfortunately not enough people stand up to try to push for the clear delineation between those two.
Parham Nasseri: Hey, that's exactly, I think, the genesis behind these regulations. That say, look, the regulators have come to a point where they say, "Look, just recommending a product without any due diligence, without just really truly knowing the client, ain't going to cut it." Right? So now, post December of 2021, there is going to be an added level of pressure on firms to truly act in a more aligned manner to their clients. That's truly why the regulations have been put into place. Are they're going to be loopholes around this? Potentially.
Parham Nasseri: And I think firms who do that are eventually they'll [inaudible 00:12:13] lose business because of that underlying principle that you mentioned, Jason. [crosstalk 00:12:17].
Jason Pereira: Oh, we hope. We hope. We hit on a bunch of rabbit holes, but in the interest of time, let's make sure we get back to the core here. There's major tent poles to this reform. Let's talk about each of them in the time. So please, start with the first one.
Parham Nasseri: Yeah. There's the three that, Jason, you mentioned, is enhancements to existing requirements. Number one is specific requirements around the know your client rule. And I think the know your client rule is going to be expanded to the benefit of the client. What's now being specifically called out is, hey, in addition to understanding what your risk tolerance is, what the particular investor or client's risk tolerance is, a financial professional now has to understand the risk capacity of a client. Why? Because those could conflict from time to time. Right? Somebody could say, "Hey, I love Bitcoin. I want to invest in Bitcoin." But do they necessarily have the capacity from a financial perspective to take that increased level of risk?
Jason Pereira: So this is, and I'm going to pick your brain on this one, so this is a pure [inaudible 00:13:21], some people going to get lost in. Okay. So risk tolerance, according to academia, is your ability or your personality around risk. Right? How much are you willing to tolerate risk? But that's kind of a personality trait typically measured by psychometric profiling questionnaires. Which by the way, most of the industry uses absolute garbage questionnaires that were developed by their marketing department, and aren't even traceably calculated properly. But there's a number of really good and an ever expanding number of third-party tools that are tested rigorously by academia.
Jason Pereira: So that's the first. And by the way, for any advisor who is not using something tested by academia, and using something by a marketing department, I have spoken to the OSC on this. And I said, "You should have put that in, but it would have to be tested." And they're like, "Oh, well, we didn't say that, but that's where we're going to test [inaudible 00:14:05]." So it's like, you better be getting this right. Capacity is one's ability to absorb risk. That's the difference, right? So one is a general predisposition. The other one is, can I actually, in my personal life, take this? Now here's my question to you. I don't understand for the life of me how that can be done without a financial plan. Without a financial plan that tests for someone's ability to absorb loss, how is it possible to measure capacity? And I really don't know.
Parham Nasseri: Yeah. You know what, Jason, I think this goes back to the whole point about our industry maturing, our industry trying to take incremental steps to up their game. Right? So, to your point, would a financial plan be a beneficial process in map optimizing that KYC or risk tolerance piece? Probably, right? That's going to get you further along. Let me say it this way, are most financial professionals going to have, or should they have a good idea of what Parham Nasseri's ability and willingness to take risk is? They should. If I'm an existing client of a financial advisor and they don't know that, that's a little bit of a problem. So what the regulations are trying to do, right? In principal say, look, really get to know your client. Right? To the best degree possible. Now, are there going to be, to your point Jason, are there going to be really 10 out of 10 ways of doing that? 100%. But what the regulators are saying, look, codify this process. Right?
Parham Nasseri: If Parham Nasseri has a high risk appetite, right? And wants to acquire tech startups and every brand new cryptocurrency investment, okay. He's got a high risk tolerance. But, does he have the capacity? So that question needs to come. So what was happening before is kind of, we got to take a quick step back. What was happening before was, an investor would say, "Look, I want to buy some penny stocks. Can you give me access to a penny stock?" Or, "I have a high risk tolerance." Advisory would say, "Okay, let's work with you on some of those high... You clearly have a high risk tolerance." The question that's now being asked is, look, does Parham Nasseri have a financial profile to be able to assume those risks?
Parham Nasseri: I could have six mortgages and be neck deep in debt, maybe I should not be taking my retirement savings and investing it in the highest risk thing. Because if that implodes, [crosstalk 00:16:21]-
Jason Pereira: I mean, to me it's going to be the real litmus test is, where do people draw the minimum bar on this? I'll be interested to see in a couple years just how effective this is. So with this, how often do all the traditional KYC things, like address, employment, basically... What's it called? Wages and now risk profile. How often is that going to be expected to be updated under the new CFR rules?
Parham Nasseri: I think this is a little bit of a trap for me, Jason. They've actually codified this. What wasn't necessarily specified as to the greatest detail before was given whatever channel of operation, how frequently does a financial advisor or professional have to call the client and say, all right, update me on your current circumstances? This goes to a point we were talking about earlier, Jason. The frequency of this touch base or annual KYC process has been codified. Meaning, that you are going to get your financial advisor calling you and saying, "Hey, tell me what's changed. Tell me what's going on. Tell me about your total assets, total liabilities." You're going to feel like that's a little bit of an infringement of your privacy. Why is this person asking you this again and again? But, again, the intention behind the regulation is for the financial advisor who's giving you investment recommendations, for them to truly know how your circumstances have changed.
Parham Nasseri: I think, Jason, I'm going to front run this. Because if I was you, I would say, "Well, should you do it more often?" Right? Do you need a regulator to come in and say, "Hey, thou shall talk to your client at least once a year." Most financial advisors are actually doing it way more frequently than that, quarterly, semi-annually, whichever. Monthly. Right? [inaudible 00:18:01] develop that relationship. But there are folks who don't do it. Right?
Jason Pereira: Clients who don't reply. It happens. I actually think... This may sound a little bit contradictory for me. I actually think a lot of that will probably be handled through a digitized workflow. You get an email saying, "Here's our record for you. Please update. Adviser will be notified of any changes to that profile." Right? And I am generally okay with that, because there are certain things like, "Hey, I maybe talk to my client every three months", or whatever it is, "but they decided to quit their job two weeks after I spoke to them last. And I didn't know that." Right? I didn't know that. And then the end of the year comes up and did I update this? And now I'm behind the eight ball, right? So I have a little problem with the digitization of that. I think if anything, it's going to be a default going forward.
Jason Pereira: So KYC, anything else you'd know about that before we move on?
Parham Nasseri: I think we've covered the gist of it, in good faith.
Jason Pereira: Yeah. So bottom line as a consumer, you should expect your advisor to be bugging you more for this information on a regular basis. If they're not, and they're just leaving, there's nothing being updated, they're not living up to their requirements. The second one is the bigger, newer one. The KYP, tell us about that one.
Parham Nasseri: All right. Here's my opinion. KYP stands for knowing your product. And it sounds kind of funny if I were to get into it theoretically with you, Jason. But the new obligations are that, A, the firm that you're dealing with, the financial institution you're working with, has some process in place for being a gatekeeper of the products that they're making available to their financial advisors, and you in turn. And then the individual advisor, the individual financial professional has to do some additional due diligence around the products that they're recommending for you in your portfolio. Fundamentally, think about this KYP piece as this gatekeeper function. Gone are the days where a financial advisor can recommend a product to a client, to an investor, without the firm knowing what the heck that product is all about. How that product's changing. Is that product in my client's best interest?
Parham Nasseri: Let me step back a little bit, Jason, on this. Because prior to the client focus reforms, the regulators, there was guidance around know your product. Everybody had to do it, but it was just guidance. Nobody had [crosstalk 00:20:21]-
Jason Pereira: Exactly. Where was the actual methodology for it?
Parham Nasseri: Exactly. Nobody said, "Hey, thou shall do this." It was like, "Hey, it's good practice. Make sure you follow good practice." Right? So what the regulators have done, is they've codified. They said, "Look, come the end of 2021, we expect you to have a process at an entity level, at a firm level. And also the individual advisor level." Let me geek out on this a quick minute. At the firm level, what they've prescribed is, hey firm, you've got to have a process for approving the products you make available to your firm. Have a process for monitoring changes, significant changes.
Parham Nasseri: So if a risk of a product changes, or fees of a product changes, you have to know that at an entity level. And also, you have to monitor your shelf and assess the products that you're making available to your the end the line investors. And then at the individual level, it's the KYP segues or straddles between suitability, which is the third element, and KYP. And the financial advisor really, instead of saying, "Here's a fun fact document. Here's a perspective buyer beware. Here's a disclosure." Now the financial advisor has to prove that they've done some due diligence. Okay? And due diligence could mean...
Jason Pereira: You see me laughing. Continue.
Parham Nasseri: I just keep seeing the smirk go up, Jason, leading indicator on what kind of questions I'm going to get back.
Jason Pereira: So, let me address what I hear when I hear this. First off, I see... I'll address the entire, they have to prove it. As someone who's been in this business for over 20 years. And it's just like, oh, you want me to record my reasoning for why I'm doing X. And my response is, like all sorts of CFA and holding myself to the standards. Just like, what were people doing before, right? If you don't have a methodology for selecting investments, and that's not like, even if you didn't have it. If you can't document that in five minutes on a notepad as, this is my process, and this is what I typically follow but it's a bit informal. If you can't document that, something is wrong. Now, don't get me wrong. I mean, plenty of stories in the industry about just, there was the whole... I got a good relationship with this wholesaler, or this new product came out, whatever it is.
Jason Pereira: And the diligence levels are abysmal for many advisors out there. Very true. But I laugh at this and say, "You mean we're supposed to be documenting what we're supposed to be doing in the first place?" Fantastic. Right? This is why I've never had a problem with most changes. It's like, I'm already doing this. The second thing, and we discussed this previously. This new level of obligation, the second I read it I thought to myself, well, this is going to lead a number of institutions to basically block anything but proprietary products. Meaning, the product that they manufacture themselves, specifically banks. And various levels of those institutions have been doing this. I would say that's an excuse, and a poor one. But nevertheless, that is something you're probably going to see if you're dealing with certain financial institutions. Is say, hey, we no longer...
Jason Pereira: Perfect example, and this is open record. TD announced this, right? TD announced this for TD financial planning. That no longer going to support third-party mutual funds, or whatever else it is. We're just going to do our own. Now that's a negative. Let me say one other thing before I go back to you, and its advisor's reaction to the KYP issue. The number of advisors I hear who are freaking out. Like, "Oh, that means they're going to shorten my product shelf, and I don't want that." And my response is, "There is tens of thousands of fund codes in this country. How many do you need access to, to really get your job done?" And it's amazing. People are terrified that this esoteric things are going to come out the next month and they're not going to have access to it. When, any institution I speak to on the independence side, it's like, "No, no, if you want access to it and you're willing to do the [inaudible 00:23:49]... And we can support the research. And you're willing to commit to it, we will do the research for it."
Parham Nasseri: Yeah. Yeah, yeah. Okay. Love the [crosstalk 00:23:57].
Jason Pereira: That's my rant. You tell me about what everything I just said and where I'm right or wrong.
Parham Nasseri: What's healthy about our conversation is, I think we've got slightly different views on it.
Jason Pereira: Good points.
Parham Nasseri: Not to say, look, the proof is in the pudding. Right? Come the end of 2021, or come next year when everybody opens the kimono a little bit, we're going to be able to see how... Are clients are going to be attracted to advisors who give them more options, or less options? That's the end result. That's the end state that we're all looking at to see, hey, are these regulations [effective 00:24:30]? Let's start with the whole principle of being a gatekeeper of the products you're making bill. The firm's responsibility, is it a good thing that firms now have to be that gatekeeper and say, all right, which... Think about it as a car dealership, right?
Parham Nasseri: Does a car dealership know what kind of products are going in and outside of its dealership? [crosstalk 00:24:49]-
Jason Pereira: They had liability anyway, these were the institutions getting sued when something went wrong. So how is it that they weren't gatekeeping before?
Parham Nasseri: And this is why I think that there's lots of people who throw eggs at regulation and say, "Oh, regulation, it impedes..." What the regulators are saying is, "Look, this is actually a good thing. Have a process firm. Have a process for that gatekeeping function." And look, my firm, obviously we're a software provider to the same firms. When we did a study, how much material or significant change happens, given the 60,000 product codes that are out there in the universe? It's a lot. It's over 20,000 changes on average per week. That's why firms were not doing it before.
Parham Nasseri: It was not humanly possible. Right? Now the requirements are saying, look, it's codified, you got to do it. You have to. And come up with a process. And so it facilitates, in my opinion, innovation. Where people say, all right, you pointed out the workflow process, digitizing the workflow. We've got a workflow process. And then a lot of firms are taking that up and saying, all right, instead of hiring someone or instead of not doing this, let me take control of that gatekeeping function, both in principle and in my client's best interest. So if a fee goes up or down, let me be aware of that change and notify my clients. So gatekeeping function, KYP process, fundamentally good. And it's going to have a longterm benefit to clients.
Parham Nasseri: Now, are there firms who were going to say, "Ah, I don't want to do this gatekeeping function. The only way forward for me is going to be command and control. I'm going to limit my number of clients to 12, or the number of securities they make you build. Limit that." Maybe. Maybe some firms are going to do that. And here's my personal view on this, just so [crosstalk 00:26:27].
Jason Pereira: Big asterisk.
Parham Nasseri: Is that in the client's best interest? Right? Is it [crosstalk 00:26:33]-
Jason Pereira: Okay, it is in the client's best interest such that the universe is not limited to a point where they cannot be adequately met. Now that's a very open to interpretation statement, right? And I will say, like I said with fund company, what banks, and I took a shot at them on this. Is no one institution can guarantee that their proprietary product is the lowest cost index EPF. That their active management is best in class across the board in every subcategory that exists. So the reality is, is that they have to... Those companies are not going to be able to meet the client's best interest at all times because they can't guarantee that outcome.
Parham Nasseri: See, and what you're touching on right now, I think is the unintended outcome of the regulations. Is something that's going to... Something [crosstalk 00:27:14]-
Jason Pereira: ... unintended outcome for manufacturers and distributors alike. Like, [crosstalk 00:27:19] those were [crosstalk 00:27:20] integrated, what a convenient unintended outcome.
Parham Nasseri: Right. But the key point to look at is, this state of perfection, or equilibrium, is a utopian concept. What we're doing right with the regulations, and I think you're getting the gist of which side of the fence I sit on. The regulations are saying, look, do more. Be a gatekeeper of the products that you're making available. Is that going to create potential issues down the line or potential imperfections, and that equilibrium is going to move, shift here and there? 100%. But this is what I think the client [crosstalk 00:27:51]-
Jason Pereira: Okay, here's my one counterpoint, if I may? Again, you just mentioned 20,000 changes, or something like that, right? On a weekly basis. This is a data problem. This is not a, I need an entire... Like back in the old days it was like, I'm going to have to hire three floors of people to handle all this. BS. This is a data problem. If you can't handle this, get your damn systems in order.
Parham Nasseri: Listen, hey, as a technology vendor, providing compliance "pain relief", that's exactly what we do. That's what our intention is. And we firmly believe that this is a data specific issue. It's a big data problem. Right? And in today's day and age, the big data problem can be solved with a high degree of confidence, and in the client's best interest with technology. So let's come down to the advisers, in the interest of time. And the advisors now have to do some comparative exercise. Okay? Between knowing the product, proving that they know their product, and their enhanced suitability requirements. They have to, of what's been actually codified in the regs list, consider a reasonable range of alternatives. There's been a lot of time and hair-pulling that's been done behind the scenes around, what does this actually mean?
Parham Nasseri: By the way, quick tangent, the regulator south of the border have required the same requirement. Instead of reasonable range of alternatives, they've called it reasonably available alternatives. Semantics. Really same thing. So what does it really mean? And this is the part that actually you have to consider as an investor post December 2021. When your financial advisor recommends a product, you can actually conveniently say, "Hey, how does this recommendation compare against similar products?" They have to do that due diligence to act in your best interest, to truly recommend the product that's most appropriate for you. [crosstalk 00:29:34]-
Jason Pereira: ... thinking about that? I'm going to make a very tongue in cheek comment here. Once you've actually looked at all the evidence and given up on active management, this becomes a lot easier. Because then it becomes about market exposure and cost. That's it. Right? Anyway, that's my tongue in cheek comment. I know I'm going to get some hate mail, but continue.
Parham Nasseri: The debate about asset and active management is, it's a good one. And it's going to continue, I think, in our lifetime, Jason. But I think going back to the specific requirements, what's interesting is, what's going to come out of this? Right? And in my opinion, I think what's going to come out of this, we're seeing snippets of it bounce out. Because don't forget their requirements came live in June of 2020. And the regulators are now saying, going to firms and saying, knock, knock. All right, show me your process for considering a reasonable range of alternatives. I mean, this is where the level of professionalism is getting elevated, specifically purely by regulatory requirements. Is it perfect? Jason, completely agree with you, it ain't.
Parham Nasseri: Are we moving towards it? Probably. Because what the financial advisor now has to do is say, "All right, every time I make a recommendation to Parham Nasseri, to Jason Pereira, let me make sure I've considered other options. Am I recommending the most costly option, the highest risk option?" If so, I better know my product and do some due diligence that proves that I am not recommending the most highest cost product.
Jason Pereira: Which also lends itself towards advisors developing model portfolios, where similar clients are basically put in the same portfolio. And it's amazing how many advisors push back on that, thinking that everybody in this world is a unique snowflake. And that they have to be able to have a different portfolio for every client. That is a completely un... Even pre-CFR, logistically impossible to maintain. Right? So reality is, is that this is actually on the advisor side. Not that hard. It is, determine how you're going to run money, develop portfolios that are models, develop different portfolios for different use cases, and document your process for how you do it. And at least on an annual basis, but it should be more than that, go back to the drawing board and make sure you're beating everybody's best interest.
Jason Pereira: Let's move on to the last tent pole, suitability. This is the one that ties the other two together, right?
Parham Nasseri: Yeah. And I think we've touched on it a little bit already. And suitability, I've spoken a lot in the industry about this. Suitability is fundamentally a matching exercise. Are you high risk, therefore your investments have to be high risk. Are you low risk, therefore... it's a, think about Lego pieces coming together. Right?
Jason Pereira: I know who you are. I know what the product is. These things have come together to say, based on all that, this is what you should have. Right?
Parham Nasseri: Yep. Purely a matching exercise. The firms that are not making suitable recommendations, that's a separate issue. They should be, 100%. Now this best interest client focus reporting piece says, look, in addition to suitability, you've got to also consider several... You've got to consider, again, that concept of reasonable range of alternatives. Is it suitable? Can I make a recommendation to Jason Pereira that is suitable given his risk tolerance, time horizon, so on and so forth? Yes. But is that recommendation the right one, the best one for Jason Pereira? So what that requires is some due diligence. This is where suitability and KYP do a little bit of a struggle. Where you say, all right, is this recommendation actually at the lowest cost alternative, or a lower cost alternative, a lower risk alternative? And I think this is where it's going to hit the fan a little bit.
Parham Nasseri: And we're seeing snippets of this down south. Where regulators are saying, "Hey, show me your process for considering a reasonable range of alternatives." Right? And firms are like, "Well, we look up a few funds online, and here's [crosstalk 00:33:12]." So that process now needs to be documented. And you can now, as an investor, post 2021, you can ask your financial advisor, say, "Look, what alternatives did you consider before making this recommendation?" This is going to be, in my opinion, a good way, a positive way to move the dial. And nudge to our industry to actually act in their client's best interest because of that simple requirement. If firms have a closed product shelf, I'm going back into the theory of this a little bit. The firms say, "Look, these are the only products I make available." That's not going to necessarily lead, in my opinion, to the longterm benefit of the client. Right?
Parham Nasseri: It's like going to a Mercedes dealer and saying, "Hey, I want best performing car." Well, is Mercedes the best performing car? Could there be better ones? So
Jason Pereira: [inaudible 00:33:58] looking across up the street at the McLaren dealership saying, "Yeah, we can help you."
Parham Nasseri: Right. [crosstalk 00:34:01] For the price you want to pay, but is the best alternative [crosstalk 00:34:05] that's the most appropriate for you. The car analogy always sticks in for me, but I'm sure there's other better analogies out there.
Jason Pereira: Yeah. But no one goes to Mercedes dealership expecting to be sold a McLaren. Right? But the reality is, you go to a financial advisor, regardless of where you are, and specifically a lot of times the larger ones. Thinking, okay, so these guys are so big they can do whatever. And that's not necessarily the truth. So to wrap this up, in terms of what a client can expect, let me make sure I got this right. You can tell me if I'm right or not.
Jason Pereira: First off, you should expect your advisor to be more proactive about collecting more personal information on you. Specifically, and again, don't take offense to this and think it's invasive. The reality is, is that there's only so much an advisor can do if they don't understand who you are and what it is you're trying to accomplish, and your specific situation. So that's the first. The second piece, is the advisors need to document and provide reasoning for what it is they are basically recommending. And the last part is, and suitability, match those two up. Now I would say, how as a client the way you test that, is you can simply be able to point to any individual holding and say, "Well why is it I hold that?" And the advisor should be able to say something more than, "Well it's launch and performance is great." Right?
Jason Pereira: Or it's got a five-star morning star rating. If that's what they're telling you, run away. Because five star becomes one star within five years, it's normal. So the reality is, where is the thought process, the methodology? You should be able to get all those answers. And frankly, I would encourage any advisor listening to this to get ahead of this and document that for yourself in the next couple months, and be ready to make that public. In fact, go ahead and put that on your website. Because frankly, that just shows what your process is. And frankly, everyone who invests with you should understand your process to some degree.
Parham Nasseri: Couldn't have said it better myself, Jason. Well done.
Jason Pereira: Excellent. Parham, thank you very much. This has been a good [rib 00:35:47] back and forth. And this got a little bit in the weeds of the industry as a whole, but I sincerely hope that the clients listening and the investors listening take this conversation to deep consideration. Because frankly, the proper [implementation 00:35:59] of this stuff just points to the fact that you're dealing with a diligent and responsible and professional advisor. If you're not seeing that, you got a question what's going on.
Parham Nasseri: Excellent.
Jason Pereira: Thank you so much for your time.
Parham Nasseri: Thank you for having me.
Jason Pereira: And that was this week's episode of Financial Planning for Canadian Business Owners. I know it's a bit of a tangent compared to the normal ones. But again, this is a momentous change in regulation that will have an impact on you. As you heard, from the very least you'll be bugged more often, hopefully, for information. Which is a good thing. And as always, if you enjoy this podcast, please leave a review on iTunes, Stitcher, or wherever you get your podcasts. And until next time, take care,
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm, catering to high-net-worth individuals, business owners, and their families. To learn more, go to woodgate.com. You can subscribe to this podcast on Apple Podcast, Stitcher, Google Play, and Spotify. Or, find more episodes at jasonpereira.ca. You can even ask Siri, Alexa, or Google Home to subscribe for you.