Client Suitability, Disclosure and Sales Practices
Core concepts
Suitability requires a firm to understand the client (knowledge, experience, financial situation, objectives), understand the product (risk, complexity, liquidity), and match the two. Know the difference between execution-only (no suitability assessment, limited protections), advisory (personal recommendation triggers suitability), and discretionary management. Understand appropriateness testing for complex products and the warning required when a client lacks knowledge.
Learn disclosure duties: costs and charges, conflicts of interest, product risks, and the distinction between financial promotions (marketing) and client communications. Know the rules on inducements, best execution, and fair treatment of customers. Understand record-keeping of suitability assessments and the right of clients to complain and seek redress.
Traps
Questions often confuse suitability with appropriateness: suitability is a full match of product to client objectives; appropriateness is a narrower test of knowledge and experience for non-advised sales. Another trap is assuming execution-only removes all duties - financial promotion and fair-treatment rules still apply. Watch for 'past performance guarantees future results' - it never does, and misleading promotions are prohibited.
Worked example
A retail client with no derivatives experience asks to buy a complex structured product on an execution-only basis. The firm must perform an appropriateness test; if the client fails, it must warn them, and may proceed only if the client insists and the firm's policy allows. The firm cannot simply execute silently.
Rule of thumb
Know your client, know your product, document the match. If the client lacks knowledge, warn and record the warning.