KYP - Know Your Product - Blog - Brock Shores Financial #ImprovingFutures

Article Notes / Review of KYP

I believe I have been practicing KYP since I started this business of investing clients money back in 1993. The term has evolved and is now the buzz word of the day. Started to see it evolve a few years ago, typically it would come up on a risk nd objective review from compliance department. I was having a problem with my clients portfolio being invested in a portfolio being invested in assets that were deemed less risky than what their risk acceptance was. Part of that was portfolio design, the portfolio's reduced risk and allowed one to have what was known as more risky investments in it, so I was off side because was not investing the assets aggresively enough. I tried to explain that for awhile, gave up, better to make the risk profile match the box. Not a big problem, just a flaw in the administration of this. I might also note that risk is a four letter word, but it means a lot more than that, and most people do not understand what risk is. That is a comment for another time. The other challenge is with Objectives. Many of our protfolio's have ranges of income and equity assets. Sytstems used for monitoring KYP look at the top range of income and do not always match the actual or the typical range , so going by the portfolio's actual composition typically puts one offside, as they look at the portfolio as a product vs a portfolio, the meaning of P would be another comment that could be expanded upon in the future. So once again, adjust the box to match the product vs the portfolio is the way to go to reduce compliance anxietity.

KYP is more than Risk and Objectives, two metrics that are easily compared and monitored. The focus is on Product not necessarily the Portfolio, there is a difference, but it's not the hill to fall on your sword for. Other thinks in the Product is the fees, the style, the managers, etc.

So the reforms require number of obligations on our dealership, systems for monitoring, training, accessing, etc. Professional judgement filters into the process. Documention is going to be a big deal. So for the last year or so I have been test driving a Client Suitability Worksheet (CSW) that focuses on the risk and objectives of a portfolio as per the product ranges. It has helped to get the portfolio metrics to match the clients box's. The client boxs for risk and objectives is somewhat guided by professional judgemet, that judgement based on client advisor discussions, questionaires, feelings, educations, time frames, goals, expectations and overall desired outcomes. So the CSW allows us to align product with client KYC expectations. I use the word expectations gently and it really means the client is ok with this product, as example their ability to have more risk in a portfolio is often higher than what the portfofolio offers ( I think that is good thing ) The objectives of assets allocation is often a range in the Portfolio, as mentioned previously the KY Product method does not accomdate ranges very well, so you go along to get along ( with compliance) Client is often unaware and interestingly enough, I have to bring this into the conversation, at first that seems a little strange, but if you do not and the client does a deep dive on their own or say for a second opionion, you have a lot of back tracking todo, I would think.

Fee's , what to do with fee disclosure. Well for last couple years ( 3 I think it started in 2018 ) legislation CRM has mandated that fees paid to advsor / dealer be disclosed on annual stmts provided by the dealership. In the past most fees were let say hidden in the prospectis, then easier figured out in the Fund Fact Sheet FFS. The FFS is a document that we give out and go over with client and have them sign for, that shows the fees, historical performance, risk and discussion on objectives, worst and best case fluctuations since inception, portfolio composition, by industry, geography, asset type and company,bond, portfolio of portfolio major holdings It is a good educational piece. It only gets updated once a year. So we will often suplment that with a current performance document available from the fund company. So the FFC is a good and important document for the client and advisor to know the product and the portfolio better. I also use the FFS to highlight fees that are charged , the different ways and the different types, this is often signed by client as ackknowledgement of the the fee discussion. A note in your meeting notes suffices, but a signed document highlighting is much better memory I think and is good for the client to understand. I suspect that practice is not done at many places and thus this CRM and KYP initiative debelopment over the years. Our mission has always been to provide full discloser and understanding of what is going on and how we are compensted.

Late this summer I began developing a more transpartent fee disclosure worksheet, in all my years of being in business I have not come across one. I have always wanted to do so, but found I never really got around to doing it. So, with a bit of work we are now able to get a close estimate of what the client fees will be over the course of a year for each major part of the portfolio. The source info is based on cost discloures in the FFS and allocation of management fees between ffund company, dealer and advisor. broken down by the month and the year. It's a good guide to demontrate sometimes the charitable aspects of our efforts on smaller accounts. It also helps guide you the advisor about the level of service and value added that you should be providing to different clients. It's a great tool and we are implementing this on each update and interaction with new clients going forward. This worksheet provides an estimate and is suplemnted with the annual statements from our dealership. So when a client is reaidng the year end stmts they will have a reference to relate that to. I am rather pleased with this stepped up method. If there is any issues regarding fees, it's a solid document show our professionalisim and our desire for good disclosure.

KYP is putting out there the cheapest fee option has to be offered to the client, that sounds good in theory, however, administration of that will need to be looked at, most companies that I deal with are very similar. Tools and tracking and recomendations should be offered by our dealership to enhannce that aspect, a heavy handed approach might not be a good idea. Frankly if we can get a lower cost for the client it does not change our compensation ratios, currently that is in the .5% to 1% range, frankly with the discontiunace fo DSC options next summer, the 1% perhas should go up on smaller accounts, discussion for comment at a later time.

One of the requirements is comprehensive and inclusive notes should accompany recommendations, that will be interesting , exactly what that means, I think a tick box of some sort might be in order, there is a lot of territory to cover in those two words, writers crmp might slink in. Comparing one product to 5 others and give your reason why you picked A or C over E and why not D or B, that will be interesting.

Managed portfolio's that I have been an early adaptor for will reduce some of the challenges discussed in the article, as all those little details are taken care of and in many cases adjusted at the end of the day automatically. What's going on under the hood was mentioned in the article, as you can see from my limited comments, there is a fair bit and I have not even gotten into many areas that go into a portfolio construction. KYP is a bit of an educational process for advisor, many who are doing this already, just a more formalized processed, which is code for documentation. So documention is code for cover the realationship so less litigation opportunity's is possible. That is ok, let's just make it possible to do so in practical ways that help educte the client, and enhance relationship. I am hopeful that we are heading in that direction.

Some if the big banks have removed products from their shelf's , probably a good idea for them, frankly there is so many option in products, a few less and more focused understanding of what you have is a good thing.

We always need to gaurd against chasing performance, taking on more risk than necessary and being under diversified. We should have strategies that allow the client to get the est returns with the least risk. It's a bit of a puzzle that keeps shifting and is at various levels, various goals, various expectations. The artical spoke about a holistic approach to return metrics, holistic gives a lot of wiggle room, sounds good, regulators typically want technical solutions, holistic is far from that, guess will have to see how that all progress's.

"One of the nice things about Omega Stewardship is that it is our mission to provide that level of best stewardship and service, not the cheapest, but the best, and be good for you, just like the Omega 3 Egg . Stewardship is typically lacking in today's approach in many things, getting the two of these working together is important to me, to my team. Guided by our Core Values and Our Vision of Improving Futures, Helping Families Achieve Life's Major Goals, the rest is just commentary." ~ TLR

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Timothy Ross October 14, 2021 at 7:58am

Article Notes / Review of KYP

I believe I have been practicing KYP since I started this business of investing clients money back in 1993. The term has evolved and is now the buzz word of the day. Started to see it evolve a few years ago, typically it would come up on a risk nd objective review from compliance department. I was having a problem with my clients portfolio being invested in a portfolio being invested in assets that were deemed less risky than what their risk acceptance was. Part of that was portfolio design, the portfolio's reduced risk and allowed one to have what was known as more risky investments in it, so I was off side because was not investing the assets aggresively enough. I tried to explain that for awhile, gave up, better to make the risk profile match the box. Not a big problem, just a flaw in the administration of this. I might also note that risk is a four letter word, but it means a lot more than that, and most people do not understand what risk is. That is a comment for another time. The other challenge is with Objectives. Many of our protfolio's have ranges of income and equity assets. Sytstems used for monitoring KYP look at the top range of income and do not always match the actual or the typical range , so going by the portfolio's actual composition typically puts one offside, as they look at the portfolio as a product vs a portfolio, the meaning of P would be another comment that could be expanded upon in the future. So once again, adjust the box to match the product vs the portfolio is the way to go to reduce compliance anxietity.

KYP is more than Risk and Objectives, two metrics that are easily compared and monitored. The focus is on Product not necessarily the Portfolio, there is a difference, but it's not the hill to fall on your sword for. Other thinks in the Product is the fees, the style, the managers, etc.

So the reforms require number of obligations on our dealership, systems for monitoring, training, accessing, etc. Professional judgement filters into the process. Documention is going to be a big deal. So for the last year or so I have been test driving a Client Suitability Worksheet (CSW) that focuses on the risk and objectives of a portfolio as per the product ranges. It has helped to get the portfolio metrics to match the clients box's. The client boxs for risk and objectives is somewhat guided by professional judgemet, that judgement based on client advisor discussions, questionaires, feelings, educations, time frames, goals, expectations and overall desired outcomes. So the CSW allows us to align product with client KYC expectations. I use the word expectations gently and it really means the client is ok with this product, as example their ability to have more risk in a portfolio is often higher than what the portfofolio offers ( I think that is good thing ) The objectives of assets allocation is often a range in the Portfolio, as mentioned previously the KY Product method does not accomdate ranges very well, so you go along to get along ( with compliance) Client is often unaware and interestingly enough, I have to bring this into the conversation, at first that seems a little strange, but if you do not and the client does a deep dive on their own or say for a second opionion, you have a lot of back tracking todo, I would think.

Fee's , what to do with fee disclosure. Well for last couple years ( 3 I think it started in 2018 ) legislation CRM has mandated that fees paid to advsor / dealer be disclosed on annual stmts provided by the dealership. In the past most fees were let say hidden in the prospectis, then easier figured out in the Fund Fact Sheet FFS. The FFS is a document that we give out and go over with client and have them sign for, that shows the fees, historical performance, risk and discussion on objectives, worst and best case fluctuations since inception, portfolio composition, by industry, geography, asset type and company,bond, portfolio of portfolio major holdings It is a good educational piece. It only gets updated once a year. So we will often suplment that with a current performance document available from the fund company. So the FFC is a good and important document for the client and advisor to know the product and the portfolio better. I also use the FFS to highlight fees that are charged , the different ways and the different types, this is often signed by client as ackknowledgement of the the fee discussion. A note in your meeting notes suffices, but a signed document highlighting is much better memory I think and is good for the client to understand. I suspect that practice is not done at many places and thus this CRM and KYP initiative debelopment over the years. Our mission has always been to provide full discloser and understanding of what is going on and how we are compensted.

Late this summer I began developing a more transpartent fee disclosure worksheet, in all my years of being in business I have not come across one. I have always wanted to do so, but found I never really got around to doing it. So, with a bit of work we are now able to get a close estimate of what the client fees will be over the course of a year for each major part of the portfolio. The source info is based on cost discloures in the FFS and allocation of management fees between ffund company, dealer and advisor. broken down by the month and the year. It's a good guide to demontrate sometimes the charitable aspects of our efforts on smaller accounts. It also helps guide you the advisor about the level of service and value added that you should be providing to different clients. It's a great tool and we are implementing this on each update and interaction with new clients going forward. This worksheet provides an estimate and is suplemnted with the annual statements from our dealership. So when a client is reaidng the year end stmts they will have a reference to relate that to. I am rather pleased with this stepped up method. If there is any issues regarding fees, it's a solid document show our professionalisim and our desire for good disclosure.

KYP is putting out there the cheapest fee option has to be offered to the client, that sounds good in theory, however, administration of that will need to be looked at, most companies that I deal with are very similar. Tools and tracking and recomendations should be offered by our dealership to enhannce that aspect, a heavy handed approach might not be a good idea. Frankly if we can get a lower cost for the client it does not change our compensation ratios, currently that is in the .5% to 1% range, frankly with the discontiunace fo DSC options next summer, the 1% perhas should go up on smaller accounts, discussion for comment at a later time.

One of the requirements is comprehensive and inclusive notes should accompany recommendations, that will be interesting , exactly what that means, I think a tick box of some sort might be in order, there is a lot of territory to cover in those two words, writers crmp might slink in. Comparing one product to 5 others and give your reason why you picked A or C over E and why not D or B, that will be interesting.

Managed portfolio's that I have been an early adaptor for will reduce some of the challenges discussed in the article, as all those little details are taken care of and in many cases adjusted at the end of the day automatically. What's going on under the hood was mentioned in the article, as you can see from my limited comments, there is a fair bit and I have not even gotten into many areas that go into a portfolio construction. KYP is a bit of an educational process for advisor, many who are doing this already, just a more formalized processed, which is code for documentation. So documention is code for cover the realationship so less litigation opportunity's is possible. That is ok, let's just make it possible to do so in practical ways that help educte the client, and enhance relationship. I am hopeful that we are heading in that direction.

Some if the big banks have removed products from their shelf's , probably a good idea for them, frankly there is so many option in products, a few less and more focused understanding of what you have is a good thing.

We always need to gaurd against chasing performance, taking on more risk than necessary and being under diversified. We should have strategies that allow the client to get the est returns with the least risk. It's a bit of a puzzle that keeps shifting and is at various levels, various goals, various expectations. The artical spoke about a holistic approach to return metrics, holistic gives a lot of wiggle room, sounds good, regulators typically want technical solutions, holistic is far from that, guess will have to see how that all progress's.

"One of the nice things about Omega Stewardship is that it is our mission to provide that level of best stewardship and service, not the cheapest, but the best, and be good for you, just like the Omega 3 Egg . Stewardship is typically lacking in today's approach in many things, getting the two of these working together is important to me, to my team. Guided by our Core Values and Our Vision of Improving Futures, Helping Families Achieve Life's Major Goals, the rest is just commentary." ~ TLR

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