conceptual paragraph with magnifying glass. CFR.

“To do [these changes] at scale, technology has to be able to help you. That's where Morningstar and other fintech providers come in”

Jason Stipp, director of product management, Enterprise SolutionS

“Ultimately that suitability and transparency are going to give investors the information that they need to encourage more competition among asset managers”

Danielle LeClair, director of manager research

“At Morningstar, we have a tool where we present some trade-offs so the advisor then knows how to tilt the portfolio one way or another. It’s important to have the right tools to connect those preferences”

Ian Tam, director of investment research

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What do CFRs mean for advisors and investors?

A panel of Morningstar experts discusses changes in compliance and how they may affect accountability, privacy, and transparency

Read on

Danielle LeClair

director of manager research Morningstar Canada

Jason Stipp

director of product management, enterprise solutions Morningstar Canada

Ian Tam

director of investment research Morningstar Canada

Christopher Lee

MFAA head credit adviser, Finsure Finance and Insurance

Industry experts

REGULATORY CHANGES around the world have altered the way financial advisors work with their clients. The changes increase transparency and improve the quality of advice, while shining more light on conflicts of interest. Welcomed as a step in the right direction by advisors and clients alike, the changes haven’t come without challenges. There’s the cost of updating technology and adjusting business models, and of course there is the complexity that accompanies every evolution in the finance sector. To clear up some of the uncertainty, Morningstar assembled a roundtable to explain how these changes are affecting both advisors and their clients. Hosted by James Burton, managing editor of Wealth Professional Canada, the roundtable discussion was called “Navigating the New Normal: Canadian Client-Focused Reforms and a Higher Standard of Financial Advice,” and included several experts from Morningstar: Danielle LeClair, director of manager research; Jason Stipp, director of product management, enterprise solutions; and Ian Tam, director of investment research.

One of the main targets of this increased competition will be products involving ESG. The guidance accompanying the reforms prompts advisors to seek more information from their clients about their goals, with ESG becoming a key consideration. Whereas previous standards only required that advisors ensure their product recommendations were suitable, the new standards are more specific. Advisors now need to delve more deeply into a client’s needs and motivations, creating a more robust process around knowing your client.

Although the client-focused reforms came into effect at the end of 2021, the impact of these changes is still being absorbed. “They’re not a one-and-done type of requirement,” Tam says. “For most advisors and firms, shoring up their processes to meet and hopefully exceed the minimum requirements is a very iterative process. There isn’t a single, prescribed solution.” This slow and iterative approach makes sense when you consider how many moving parts are involved. In Canada alone, for example, there are over 4,500 mutual funds and ETFs. That adds up to a lot of data points for stakeholders to address. But it also opens the door to a number of opportunities. The push to increase transparency and accountability will spur an increase in competition to provide more suitable recommendations. “Ultimately that suitability and transparency are going to give investors the information that they need to encourage more competition among asset managers,” LeClair says.

While this push toward more transparency and accountability is positive on the surface, there remains much to be done to ensure it works effectively. One problem facing advisors is the quality of information that is available to them if they are to make more specific recommendations. For Tam, it’s a problem of garbage in, garbage out – with inadequate processes early in an organization’s acquisition of information leading to a high possibility of errors farther down the road.

“We actually ran a study on risk where we observed the risk level stated in fund fact sheets in each July for the six years from 2016 to 2021,” he says. “And we found that among 252 balanced funds or allocation funds, 69 changed risk levels twice over that period and 26 changed risk levels once. “It’s unlikely that the funds themselves are fundamentally any different than they were before the risk level changed. Baking that risk level into a systematic firm-wide process that stimulates portfolio turnover can lead to unsavory outcomes for clients.” Morningstar takes this propensity to misinterpret risk seriously, particularly as it relates to “Know your client” – KYC. Stipp says they break risk down into four clearly defined segments in order to understand it more clearly. The first one is risk tolerance, he says. This is a client's psychological willingness to take on risk in exchange for return. Then there is risk capacity, which is how much risk they can afford to take. Next is required risk, or how much risk the client would need to take in order to reach their goal. In some cases that may be higher than the level of risk they're comfortable taking.

One of the key drivers behind the reforms is to improve the selection of sustainable investments. To date, both advisors and investors have been hesitant to embrace more sustainable options due to a lack of clarity.

But this is changing. Tam says the industry came together earlier this year to define a universe of funds that have disclosed sustainable investment practices within their prospectuses. Retail investors now have a common set of funds to compare against one another, he says. “Second, within the most recent guidance tied to the client-focused reforms, it is best practice for an IIROC advisor to ask whether an investor has any non-financial ESG preferences,” Tam adds. “So all this is kind of falling into place now. “At Morningstar we have a tool where we present some trade-offs so the advisor then knows how to tilt the portfolio one way or another. It’s important to have the right tools to connect those preferences.” While sustainable mutual funds and ETFs make up about two percent of the total mutual funds and ETFs, the growth rate is exponential. “So, small base, but lots of potential to grow in Canada,” Tam adds.

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Danielle is responsible for leading the team of analysts who research and determine the Morningstar analyst ratings for open-end funds, segregated mandates, and ETFs domiciled in Canada. Before joining Morningstar in 2021, LeClair spent over 13 years at a large global asset manager covering a variety of asset classes as a manager research analyst. She was most recently a senior research analyst, leading the implementation of ESG research into asset allocation strategies, including overseeing the integration of ESG into the manager research processes, conducting thematic ESG research, and participating in the development of ESG strategy across a suite of multi-asset products.

director of manager research Morningstar Canada

Danielle LeClair

Jason works for Morningstar's enterprise advisor software team, which builds modern software to help individuals and advisors create, invest for, and achieve their goals. Prior to his current role, Jason led product management for Morningstar's individual investor products, including Morningstar.com, and also led Morningstar’s individual investor-focused global editorial team. He joined Morningstar in 2002, initially managing the editing team in Morningstar’s Research department. He holds a Bachelor of Science in journalism from Northwestern University’s Medill School of Journalism.

director of product management Morningstar

Jason Stipp

Tam is tasked with evangelizing Morningstar’s thought leadership across multiple stakeholder groups within Canada’s investment industry, inclusive of individual investors, advisors, asset managers, industry trade bodies, and regulators. He is also the chair of the Canadian Investment Funds Standards Committee, which oversees mutual fund, ETF, and segregated fund classifications in Canada. Prior to his current role, Tam was a sales director for CPMS™, Morningstar’s quantitative screening and back-testing platform for equities. Before joining Morningstar in 2014, Tam worked for Thomson Reuters’ Financial and Risk Division.

director of investment research Morningstar Canada

Ian Tam

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