Client Analysis and Suitability
The Client Analysis and Suitability domain tests whether you can build a defensible picture of a client and match a recommendation to it. Examiners present a fact pattern with a conflict - an aggressive questionnaire score and a two-year horizon, say - and expect you to resolve it and record the reasoning.
What you must establish
- Objectives: capital growth, income or preservation, and any specific liability (school fees, a property purchase) with a date.
- Time horizon: when the money is needed, not when the client hopes to need it.
- Capacity for loss: the financial ability to absorb a fall without derailing the plan. This is objective and separate from attitude to risk.
- Attitude to risk: willingness to accept volatility, measured by a questionnaire but tested against behaviour in a drawdown.
- Liquidity needs, tax position, existing holdings, pension and protection arrangements, dependants, and any vulnerability such as bereavement, illness or coercion.
- Knowledge and experience, which determines whether a product is appropriate as well as suitable.
Tolerance is not capacity
Where the two conflict, capacity constrains the recommendation. A client who says they can tolerate a 30% fall but needs the capital in 18 months should not be placed in an equity-heavy portfolio; the adviser explains why and documents the discussion. Suitability is judged on the circumstances at the time, not on the outcome.
Documentation and review
The suitability report should state objectives, the recommended solution, why it fits, alternatives considered, costs and risks, and the client's decision. Reviews are triggered by agreed intervals and by life events; a change of job, divorce, inheritance or retirement date invalidates the original assumption set.
Worked example
A 58-year-old wants to retire at 62 and holds 80% of her savings in her employer's shares. Questionnaire score: 7/10 for growth. Assessment: single-stock concentration plus a four-year horizon means capacity is lower than tolerance. Recommendation: diversify the employer stock under a staged disposal plan, hold a moderate multi-asset allocation with a cash buffer for two years of spending, and record that the concentration - not the questionnaire score - drove the change.
Traps
Treating the questionnaire score as the answer. Equating tolerance with capacity. Ignoring concentration in employer stock or property. Using past fund performance as evidence of suitability. Failing to document why you departed from the model portfolio.