Client Onboarding, Account Documentation and Suitability
What must be established before trading
Onboarding combines identity (see the AML section), client categorisation (retail, professional, eligible counterparty), and the information needed to act appropriately. For advised or discretionary business the firm must gather a fact find: objectives, time horizon, financial situation, existing holdings, risk tolerance (attitude) and capacity for loss (ability), knowledge and experience, and any restrictions (ethical screens, concentration limits, no derivatives).
Suitability applies where the firm recommends or manages: the recommendation must be suitable for that client's objectives and circumstances. Appropriateness applies to execution-only business in complex products: the firm assesses whether the client understands the product and the risk. These are different tests and questions test the distinction.
The account file must include the signed client agreement/mandate, authority levels, signatories, power of attorney or trust documentation, bank detail verification, disclosure consents, and a diarised review date.
Traps
- Equating risk tolerance with capacity for loss. A confident client with modest savings and a short horizon has high tolerance but low capacity.
- Accepting a third party's instruction without documentary authority.
- Onboarding non-face-to-face without enhanced verification.
- Assuming a categorisation election (e.g. electing professional status) removes all protections - some protections cannot be waived.
- Recommending a product that meets the objective but breaches a recorded restriction.
Rule of thumb
Test every recommendation against four gates: objective, horizon, capacity for loss, restriction. Fail any one and the recommendation is unsuitable, however attractive the product.
Worked example: A 68-year-old client wanting income within three years asks for an 80% allocation to a single small-cap stock. High stated risk appetite does not fix a three-year horizon and a need for stable income - the concentration fails the capacity-for-loss and objective gates and should be refused or scaled down and documented.