How can you stay on top of KYP — and add value to your clients?

What makes for the most appropriate and personalized solutions? Advisors can only provide that and determine suitability when you know your client (KYC) – and also know your products (KYP).

Client-focused reforms have brought greater clarity to KYP expectations. A heightened emphasis on KYP stems from not only industry complexity but also regulatory audits, which have revealed documentation gaps.

While the compliance requirements surrounding KYP aren’t prescriptive, the bare minimum is some sort of independent review of a product’s structure, features, risks, and costs. Still, “there’s a lot of value-add in going beyond,” says Ian Tam, Director of Investment Research with Morningstar Canada.

If KYC is the who, then KYP is the what. Advisors shouldn’t see KYP compliance as a check-the-box exercise, says Tam. This is an opportunity, not just an obligation.

Done well, KYP enhances the advisor-client relationship by building trust and transparency, and helps show clients why it makes sense to get advice. Frankly, proper KYP will also support better advice.

The KYP landscape has become more complex with the sheer number of products. Tam notes that “plain vanilla” mutual funds and ETFs amount to roughly 4,300 ways to invest. “When you account for different types of wrappers, that universe is about 22,000,” he says.

There are 1,700-plus ETFs listed on Canadian exchanges, plus all of the individual stocks and bonds. Not all advisors have an open-product shelf. But the product universe keeps expanding. Strong KYP processes help to position advisors as well-informed and client-first professionals.

Looking beyond returns

Historical returns are the tip of the iceberg. For any given product this could mean looking at the following: wrappers; underlying holdings; trading mechanics; redemption periods; performance and liquidity risks; strategies used (e.g., active, passive, smart beta thematic); and use of derivatives to create income, costs, tax implications, and long-term impact on returns.

KYP can also involve additional factors, like ensuring investment products align with a client’s expressed preferences around ESG principles, or avoiding certain sectors. That’s a growing part of portfolio conversations.

As Tam notes, the source of the information matters. “You don’t want the manufacturer of the product to do due diligence for you.”

That creates potential conflicts and also weakens the advisor’s value proposition. Tam says advisors need to do their own review and analysis to see if a product serves the client’s best interests.

Comprehensive data sources like Morningstar’s, as well as fund analyst ratings, help advisors to see beyond the surface level.

“We want to provide a holistic view of the product being offered. This includes a look beyond returns and fees, and into the management team, the investment process and the stewardship qualities of the manufacturer,” says Tam.

Tapping into tools that distill complex qualitative and quantitative details into accessible formats supports stronger KYP — and better portfolio construction.

Balance rigour and efficiency

The right KYP processes balance regulatory rigour with efficiency and simplicity. “They work hand in hand,” Tam says. “When you use a robust source of data, there is rigour automatically built into your workflows.”

To demonstrate that a product fits with a client’s comfort and goals, Tam says a risk tolerance questionnaire is a must But often, that measure of a client’s risk profile does not map 1:1 with the asset allocation being recommended. That’s because client risk tolerance, but its nature, is measured on a different scale than the risk inherent in an investment product.

Having tools to match a client’s risk levels to product recommendations removes the guesswork. “But you want some room for professional judgment,” Tam adds.

He suggests updating risk profiles at least once a year or when a client’s circumstances change. “A tool equipped with some behavioural elements is helpful. That extra layer of scrutiny builds more robust results – namely ensuring that the client’s risk profile doesn’t change with changing market conditions. Ideally, a client’s risk profile should remain consistent in both bear and bull markets. That’s the hallmark of a good risk profiling process.”

KYP is a competitive advantage

Is it becoming even more important for advisors to demonstrate their value to clients and prospects through KYC and KYP?

Younger clients often seek greater personalization, says Tam, adding that this is something to be mindful of with the great wealth transfer that’s underway. Moreover, DIY investors are becoming more sophisticated, and as they move from discount brokerages to full-service advisors, their expectations grow.

Couple that with regulatory forces that will soon lower the barrier to switch advisors, and that “accentuates the need to compete and provide value,” he says.

KYP may start as a compliance requirement, but when done right it shouldn’t be viewed as onerous, especially as technology platforms streamline the process. Showing clients you’ve evaluated a range of options and explaining your rationale is a differentiator.

“The depth of analysis is important,” says Tam.

With it, KYP can become a core part of building an advisor’s credibility, and bolstering client communications and engagement.