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Why the investment industry should prepare for more rigorous regulations – The Globe and Mail



Toronto downtown building – King & Bay street, Looking up

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This article is the fourth article in a Globe Advisor series on the client-focused reforms, which will place investors’ interests first in their dealings with financial advisors and dealer firms and have a consequential impact on advisors and the investment industry.

Investment industry firms and financial advisors need to be working proactively on updating their client relationship policies and procedures in order to stay on top of anticipated future changes above and beyond the new client-focused reforms (CFRs) set to take effect later this year, experts say.

As part of the current set of CFRs that the Canadian Securities Administrators are bringing in, firms have until June 30 to comply with new conflict-of-interest rules and until Dec. 31 to meet other requirements for know-your-client (KYC) and know-your-product (KYP) documents, among other changes.

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However, the CFRs don’t include several other proposals that have been discussed in recent years, such as a more rigorous KYP and investment suitability processes and restrictions on referral arrangements, which many industry players believe are coming.

“You just have to look at the continuously rising trend of increased accountability, transparency and professionalism that is happening in other jurisdictions around the world, which are further ahead than we are here in Canada,” says Jason Pereira is a partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto. “The question isn’t if it will happen, it’s the speed at which it will happen.”

For example, he says there’s a “gaping hole” in how referral fees are handled in the industry that he believes should be addressed. Proposals to cap referral payments, prevent the payment of referral fees to unregistered parties and restrict the time period in which they can be made were left out of the changes taking effect this year.

Mr. Pereira believes referral fees should be audited annually to ensure there’s an ongoing service, or clients should be allowed to reapprove the fees on a regular basis.

He would also like to see the elimination of embedded compensation.

“The idea of buried trailers has to die,” he says, believing it will happen “eventually,” as more advisors move to a fee-based structure and investors start to demand more transparency as they have with other consumer products. “Full transparent reporting is something that will happen, it’s just a question of when.”

Ken Kivenko, an investor advocate and president of Kenmar Associates, describes the CFRs as “an incremental step forward.”

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As such, he says that “many good ideas were killed, watered down, deferred or moved into guidance, [which is not enforceable].”

Mr. Kivenko would like to see more aggressive changes in the future, including getting rid of deferred sales charges and updating what he sees as an ineffective and outdated investor-complaint system, among other moves.

“Most retail clients lack the skills to detect material conflicts on their own,” he says. “Progress toward a fiduciary standard is the end goal.”

Mr. Kivenko also believes governments need to get more involved in advocating for change on behalf of investors and encourages regulators to work more closely with investors and advocacy groups to understand the issues they face better.

Stan Buell, president of the Small Investor Protection Association, believes some fundamental issues don’t get addressed in regulatory changes.

“The key issue is fiduciary duty,” he says. “Relying on ‘suitability’ is difficult in that suitability is variable and not the same for everyone. Representatives with a fiduciary duty should be able to select suitable products and provide suitable recommendations.”

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Mr. Buell adds that self-regulation doesn’t provide effective protection for investors.

“A regulator that regulates an industry and is also responsible for client protection is faced with an inherent conflict of interest,” he says.

Dan Richards, chief executive at Clientinsights and an instructor at the University of Toronto’s Rotman School of Management, thinks another potential change could be a move toward mandated financial planning for investors buying investments from their advisors.

“That is something you may very well see coming in five years or sooner … and something that advisors will need to prepare for,” he says. “Because some clients don’t see the value of financial planning, you can’t force it unless regulators mandate it.”

Mr. Richards also expects advisors will need to upgrade their credentials continuously through more education and training.

Michael Thom, managing director of CFA Societies Canada, believes the majority of firms across the country are working on adopting the CFRs and understand there’s likely more regulatory evolution to come.

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For example, the additional clarity and action on title reform provisions in the CFRs, designed to remove misleading titles in the investment industry, will also be coming sooner rather than later. “The progress has been slower than some would like,” he says.

An example is the broad use of titles such as vice-president, which implies a corporate officer position when it may not be the case at some firms. “It will cause a lot of adjustment across the industry,” Mr. Thom says.

He also expects to see changes in the product selection and recommendation processes, with an additional focus on value-added services such as portfolio management and financial planning instead of simply just transactional advice.

“I think there’s room for incremental differentiation there,” he says.

Mr. Thom is also hoping for more work to differentiate and reconcile the difference in duties and requirements between investment and insurance-regulated products.

“I do worry for the potential for regulatory arbitrage and the impact on client experience there,” he says.

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He suggests firms not only implement the minimum requirements of CFRs, but also “embrace the spirit” of the changes.

“I encourage firms to take this opportunity, to the extent it’s not already embedded in their business practices, to re-orient themselves toward their clients and their clients’ interests in everything they do,” he says.

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World's Biggest Wealth Fund Makes $1.6 Billion Wind Investment – BNN



(Bloomberg) — Norway’s $1.3 trillion wealth fund has made its first investment in unlisted renewable-energy infrastructure since being given the go-ahead to move into the asset class.

The world’s biggest sovereign investment vehicle said on Wednesday it will buy 50% of the 752 megawatt Borssele 1 & 2 Offshore Wind Farm from Orsted A/S of Denmark. The deal is worth 1.375 billion euros, or about $1.6 billion, it said.

Norway’s wealth fund has been looking for such assets to purchase since getting a mandate to start buying in 2019. But as recently as January, Chief Executive Officer Nicolai Tangen said it was proving hard to find reasonably priced targets.

“We are excited to have made our first unlisted investment in renewable energy infrastructure, and we look forward to working alongside Orsted on delivering green energy to Dutch households,” Mie Holstad, chief real assets officer at the wealth fund, said in a statement.

Strategy Update

The announcement coincided with a strategy update by the fund, in which it signaled it will apply a more active approach to its investment strategy. That includes a goal of becoming a global leader in sustainable investing.

Tangen, a former hedge-fund boss who’s been running the giant sovereign investment vehicle since September, has stepped up the Oslo-based fund’s reliance on external asset managers and made environmental, social and governance goals a cornerstone of his focus. He wants to rely more on technology, including artificial intelligence, and plans to expose his portfolio managers to the same kind of training regimens that help shape top athletes.

In Wednesday’s strategy update, the fund said it will “emphasize specific, delegated active strategies and have less emphasis on allocation or top-down positioning.”

As the world’s biggest stock investor, the Norwegian wealth fund’s “knowledge of our largest company investments helps us achieve the highest possible return after costs,” it said. “It improves risk management and enables us to fulfill our ownership role. We believe our active management improves our ability to be a responsible investor.”

The fund, which generated $123 billion in returns last year, used a previous strategy update to shift its equity exposure toward U.S. stocks and away from Europe. Much of last year’s performance was driven by the fund’s holdings of U.S. technology stocks.

The fund follows a benchmark that allocates about 70% to stocks and the rest to fixed income. It also invests in real estate and was recently given a mandate to start buying renewable infrastructure.

The sovereign wealth fund, managed by a unit of the central bank, was created in the 1990s to invest Norway’s oil and gas revenues abroad, initially to prevent the domestic economy from overheating. It owns about 1.5% of global stocks.

The fund said the goal is to become a global leader in responsible investment, partly by further integrating ESG data into its investment process.

©2021 Bloomberg L.P.

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Digital investments correlate to financial success – The 21st Century Supply Chain – Perspectives on Innovative



Executives live daily with a daunting dual challenge. One part is the need to manage the business through steady-state operations and times of disruption. The other is to create value for shareholders through financial excellence and growth.

At the intersection of these two parts lies the digitalization of supply chain. Through digital transformation, supply chain leaders can begin to develop the capabilities that are already needed to manage disruption, as well as those that will help overcome known obstacles, such as data availability and quality. Layering on top of data is information and insight, which are critical to ensuring that those in supply chain are making the decisions that matter most to the business.

The operational opportunities are evident, so the rationale behind the investment is clear. However, that only solves one part of the executive’s dual challenge. Quantifying the value created through financial excellence has been more difficult, but recent research from Professor Morgan Swink of Texas Christian University now shows the correlation between investing in digital transformation and delivering financial success.

Kinaxis customers outperformed during the pandemic

Using quarterly financial statements for 48 publicly held, North American companies that use Kinaxis for their supply chain planning, Professor Swink conducted what is known as a difference in differences analysis for all of 2019 and the first three quarters of 2020. In that analysis, the 48 companies represented those who have already begun their digital transformation against industry averages for each respective vertical over the corresponding period. Furthermore, the analysis was performed as a pre/post event comparison based upon the declaration of COVID-19 as a global pandemic in Q1 2020.

While industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance.

“These data are very strong. I was quite surprised at the level of positivity in these findings,” Professor Swink said upon sharing his findings. The results were so impressive that among the initial six financial metrics compared, the group of 48 Kinaxis customers, representing the digitally transformed, outperformed their industry averages across the board.

The academically rigorous, statistically significant data shows that while industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance. The largest gap occurred for return on sales, which acts as a measure of operational efficiency, where the Kinaxis group improved by more than 1.5%, while the industry declined by more than 0.5%, leading to an overall performance gap of more than 2%. Costs, as a percentage of revenue, also were an advantage for the group of 48 Kinaxis users as both costs of goods sold and sales, general and administrative costs decreased while industry averages either declined slightly or grew.

Translate supply chain success into the CFO’s main metrics

With an impressive array of data, like the research findings, it becomes critical that supply chain leaders be able to convey the right information to the right people. In the case of what matters most to CFO’s, Professor Swink says, “The two things that every CFO cares about are profit and growth. And from the CFOs perspective, they’re looking at ways to invest money to drive profit and growth.”  

Therein lies a significant opportunity for supply chains because they have historically struggled with translating operational capabilities into financial success. This carries over to digital transformation, as well. In both cases, the benefits are typically stated in the terms of those desiring the investment, as opposed to the metrics of whomever is making the decision. As Professor Swink stated, “You need to learn what those metrics are and be able to position your proposal in that language just like the other people who are competing for those funds.”

Flow chart connecting digital capabilities to financial outcomes
Translate digital transformation outcomes into meaningful impacts for decision makers, for example, aligning supply chain capabilities to financial outcomes.

Once the metrics are identified, begin to understand how operational capabilities work as input drivers for them. For example, increased visibility is highly desirable so that supply chains can sense disruptions as it is happening and respond immediately. That alone is a tremendous benefit and it can be tied to financial outcomes such as reduced inventory and cash buffers, improved capacity utilization and lower cost resolution of demand-supply mismatches.

Taking it a step further, the improvements in return on invested capital, and even return on assets, can then be tracked as digitally enabled capabilities are now linked to these financial performance measures. By doing so, the “why an investment is needed” aligns with what it means to the decision maker.

This creates a pivot point for supply chains as Professor Swink suggests that practitioners must be able “to relate structural choices, policies, technology investments, and training and labor investments to the kinds of KPIs that show up on income statements and balance sheets.” This is crucial because “if we really want to speak the language of the CFO we must think beyond those kind of specific operational metrics to think about how our choices affect these larger outcomes.”

To hear more about Professor Swink’s research, watch his on-demand webinar, Speak your CFO’s language – Managing risk and opportunity in supply chains.

Watch the on-demand webinar, "Speak your CFO's language - Managing risk and opportunity in supply chains"

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CI Financial and industry veterans co-launch real estate investment firm – The Globe and Mail



CI Financial CEO Kurt MacAlpine in downtown Toronto on Dec. 20, 2019. Over the past 18 months, Mr. MacAlpine has been rapidly expanding CI through acquisitions in its wealth management business.

Tijana Martin/The Globe and Mail

CI Financial Inc. is making its first foray into the private real estate sector with a joint venture interest in Axia Real Assets LP, a newly formed alternative investment manager focusing on global real estate and infrastructure.

CI announced the new venture on Tuesday along with industry veterans and Axia co-founders Kelsey Boland, Darrell Shipp, Greg Stevenson and Joshua Varghese, a former CI portfolio manager.

No financial details were released by either company, but Axia will be independently operated and managed by its four partners. Prior to the deal, CI had only stepped into real assets by offering larger institutional investors access to private real estate funds and private equity and credit.

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The new venture will now allow retail investors access to private real estate opportunities that are typically hard to access, said Mr. Varghese, who managed a multibillion-dollar portfolio of global real estate equities at CI Global Asset Management for more than a decade.

Over the past 18 months, CI chief executive officer Kurt MacAlpine has been rapidly expanding CI through acquisitions in its wealth management business, as well as boosting its alternative investment arm to include alternative exchange-traded funds, cryptocurrencies and private-fixed income.

“The products people are buying today are very different from what they bought 10 years ago and they will be different five years from now,” Mr. MacAlpine said in an interview. “We are trying to be relevant to wherever Canadians want to invest – and today that includes real assets.”

With more than $3.7-billion in liquid alternative funds, CI offers retail investors access to publicly listed real estate investments through mutual funds and ETFs – as well as a private real estate fund for accredited investors.

Mr. MacAlpine said along with the growth of CI’s wealth management business, which has doubled its assets under management compared with a year ago, “the demand for both liquid – and illiquid – real estate has also increased from both institutional and retail investors.”

Rather than expand through acquisition, Mr. MacAlpine spent several months last year discussing the new joint venture with Mr. Varghese, who left his role at CI last November to start building Axia.

Mr. Varghese was joined by several former Slate Asset Management executives, including Mr. Stevenson who was the former CEO of the Slate Retail real estate investment trust, which invested in U.S. retail properties anchored by grocery stores.

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“Right now what we are seeing is a lot of the interesting opportunities in real estate that are based on the emergence of the new economy – whether it’s e-commerce warehouses, grocery stores, or data centres – and are hard to access for a lot of investors, both retail and institutional,” Mr. Stevenson said in an interview.

“As investors continue to diversify their portfolios to accumulate long-term wealth, we believe the opportunities for global real assets are significant.”

In addition to grocery-anchored real estate, which includes big-box grocery stores, other areas of interest to the firm, said Mr. Varghese, include life-science facilities, cold-storage facilities and single-family rental homes.

Mr. Varghese declined to comment on the company’s initial investment capital, but said he expects to launch the first set of investment products this summer.

“We think because of digitization and because of what that is going to do to enable societal change, we are going to see bigger changes in the next two decades than we saw in the last two decades,” Mr. Varghese said.

“When you are investing in real estate – which is a long-term asset class – you have to have a laser focus view on what those changes will look like and [the areas we are looking] will provide our investors access to the types of real estate that are going to benefit from the new economy.”

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