Posted by Anjali Kaur on Jun 27, 2022

Assessing Suitability

Once you have an understanding of your client and the products, you need to assess the suitability of products for your client. Assessing suitability is step 3 in the suitability process.

Assessing suitability involves matching the characteristics of a proposed investment, as determined by the due diligence conducted in the KYP process, with the stated needs of the client, as documented in the KYC information.

If there is any discrepancy between the KYC information and the proposed investment, the investment is generally considered unsuitable.

Making unsuitable recommendations has severe consequences for you and for your mutual fund dealer, which may include:

  1. Client complaints against you
  2. An internal investigation by your mutual fund dealer
  3. An external enforcement investigation by the Mutual Fund Dealers Association (MFDA)

Comparing KYC to the Product

When assessing suitability, you are required to compare the characteristics of the product with the following elements of the KYC information:

  1. risk tolerance
  2. investment objectives
  3. time horizon

Joe is a 27-year-old single male, working as a computer programmer, making $65,000 annually. Joe lives with his
parents and manages to save a significant portion of his income. Joe has a high-risk
tolerance. His investment objective
is the growth of capital, as he wants to have the flexibility to achieve significant financial goals later in life. He plans to work
overseas to better his prospects and wants to keep his portfolio fairly liquid so that he can invest overseas in the country where he will work.

Joe is young, with a good income and high-risk tolerance. However, his time horizon is short and uncertain due to his possible relocation. Suitable investment products for Joe are liquid investments such as money market funds, treasury bill funds, or redeemable GICs.

Beyond a client’s risk tolerance, investment objective, and time horizon, other KYC elements can be used to refine your recommendation of suitable products, including the client’s:

  1. investment knowledge
  2. net worth
  3. age

NOTE: Disclosure does not justify an unsuitable recommendation. For instance, recommending to a client with medium risk tolerance that they buy a high-risk product is unsuitable, even if you provide disclosure to the client that the investment is high-risk. Likewise, giving the same client a prospectus that fully discloses that a product is high-risk does not justify selling an unsuitable investment.

Trades Proposed by the Client

When a client proposes a trade, called an “unsolicited purchase”, you are required to assess the suitability of the product, just as you would for an investment you are recommending.

Refusing an Unsuitable Purchase Order

If you receive instructions from a client to invest in products that in your view are not suitable, you are required to provide cautionary advice that the investment is not suitable. You must also document that:

  1. the transaction was unsolicited
  2. you performed a suitability review
  3. you gave the client cautionary advice
  4. you obtained authorization from the client to proceed with the transaction

IMPORTANT: Before you execute an unsuitable, unsolicited order for a client, you should clear the transaction with your Compliance Department or Branch Manager.

Handling an Unsuitable, Unsolicited Purchase

As a dealing representative, you are not required to accept an unsuitable purchase order. Whether or not you can refuse a trade depends on your mutual fund dealer’s internal policy. Before you refuse an order for an unsuitable trade, review your dealer’s Policy and Procedures Manual, and check with your Compliance Department.

Leverage

In personal finance, leveraging by an investor often involves buying securities using a portion of his or her own money and borrowing the rest. By borrowing money an investor can make a larger investment, which can lead to greater potential returns. However, since markets and securities decrease as well as an increase in value, leveraging can also result in greater losses.

There are detailed MFDA policies and guidelines specifying what you and your mutual fund dealer are required to do when recommending a leveraged strategy, or executing an unsolicited leveraging strategy in your client accounts.

MFDA regulations require you to:

  1. Conduct a leveraging suitability assessment before recommending or undertaking a leveraging strategy at a client’s request.
  2. Inform the client about the risks, and deliver the risk disclosure documents.
  3. Be aware of and fulfill your responsibilities as a dealing representative.

Time to Test

  1. Robert is a 38-year-old dentist, single, earning approximately $90,000 annually, with a net worth of $250,000. He is working toward saving $500,000 within 5 years to buy a house and settle down. He is not investment savvy and depends on you to achieve results.

Do you have all the required client information to make a suitable recommendation?

You have omitted information about his risk tolerance.

2. Comparing KYC to the Product

Steve, a dealing representative, has a client, Edwin, who is 75 years old, with a low-risk tolerance, investment objective of income, and a 3-year time horizon.

Steve recommends a deferred sales charge (DSC) fund with a 7-year fee schedule to Edwin.

Which of the following statement is TRUE?

Steve’s recommendation is not suitable, as the DSC schedule is for a longer duration than the client’s time horizon.

Thank You!

You can read more posts related to IFIC Exams:

  1. https://learnwithanjali.com/ific-exam/regulatory-environment/
  2. https://learnwithanjali.com/ific-exam/canadian-securities-administrators-csa/
  3. https://learnwithanjali.com/ific-exam/securities-regulatory-bodies-in-quebec/
  4. https://learnwithanjali.com/ific-exam/mutual-fund-legislation/
  5. https://learnwithanjali.com/ific-exam/mutual-funds-collecting-personal-information/
  6. https://learnwithanjali.com/ific-exam/registrant-responsibilities/
  7. https://learnwithanjali.com/ific-exam/compliance/
  8. https://learnwithanjali.com/ific-exam/maintaining-evidence-of-relationship-disclosure/
  9. https://learnwithanjali.com/ific-exam/compliance-issues/
  10. https://learnwithanjali.com/ific-exam/dual-licensing-as-a-life-insurance-agent/
  11. https://learnwithanjali.com/ific-exam/sales-communication/
  12. https://learnwithanjali.com/ific-exam/registration-requirements/
  13. https://learnwithanjali.com/ific-exam/strategic-investment-planning/
  14. https://learnwithanjali.com/ific-exam/suitability-requirement/
  15. https://learnwithanjali.com/ific-exam/know-your-client-kyc/
  16. https://learnwithanjali.com/ific-exam/risk-tolerance/
  17. https://learnwithanjali.com/ific-exam/know-your-product/

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