Suitability, Know-Your-Client, and Client Relationship Management
The KYC foundation
Know-your-client information is the backbone of every suitability decision. The required elements include identity, age, investment objectives, risk tolerance, time horizon, income, net worth, liquidity needs, existing holdings, and any special instructions. The information must be current; material changes trigger a reassessment. A common exam trap is treating risk tolerance and investment objective as interchangeable. A client may want growth but have low tolerance for volatility; the recommendation must reconcile both.
The suitability analysis
Suitability has two dimensions: the reasonable-basis obligation (the product is suitable for someone) and the client-specific obligation (it is suitable for this client). A recommendation may be unsuitable even if the product is sound. Concentration, leverage, and illiquidity are the usual pressure points. Where a client insists on an unsuitable transaction, the firm's policy governs whether it may proceed; typically the supervisor must be involved and the client's instruction documented.
Traps to expect
Questions often present a client who has signed a suitability waiver. A waiver does not eliminate the duty to warn or the duty to refuse where policy requires refusal. Another trap: a representative relies on stale KYC data after a client inherits a large sum or retires.
Worked rule of thumb
Use the "two-question test" for every recommendation: (1) Does this product fit the documented objectives, risk tolerance, and horizon? (2) If the client's circumstances changed tomorrow, would this recommendation still be defensible? If either answer is no, escalate.
Relationship management
Supervisors should ensure periodic client contact, documented reviews, and clear communication of fees and risks.