HKIB ECF-RWM Core key terms

The process of matching a recommended investment to a client's risk tolerance, financial situation, investment horizon, and stated objectives before any transaction is executed. It must be documented and refreshed when circumstances change.

The onboarding and ongoing process of collecting and verifying a client's identity, financial position, investment experience, objectives, and risk appetite. It forms the factual base for every suitability judgement.

A documented rating of how much investment risk a client can and is willing to accept, usually expressed on a scale from conservative to aggressive. It is derived from questionnaire answers and corroborated by financial data.

An internal score placing an investment product on a risk scale so that it can be compared with a client's profile. It typically weighs volatility, credit quality, liquidity, leverage, and complexity of the instrument.

A situation where a product's risk rating exceeds the client's assessed tolerance, or the product's features conflict with stated objectives. A mismatch requires a documented rationale or should result in the trade not being recommended.

An investment whose terms, risks, or payoff structure are hard for a retail client to understand, such as structured notes, accumulators, or leveraged derivatives. Extra warnings and suitability checks apply before sale.

A trade executed on a client's specific instruction without any recommendation from the firm. The client bears responsibility for suitability, and the firm must still warn where the product is complex or the instruction is clearly unsuitable.

A transaction arising from a recommendation, marketing contact, or advice given by the firm or its staff. Because the firm has prompted the trade, full suitability obligations and record-keeping apply.

The client's stated financial goal, such as capital preservation, regular income, or long-term growth, together with the time horizon over which it should be met. It guides which products and asset mixes are appropriate.

The expected period before a client needs to access the invested money. Short horizons generally rule out illiquid or highly volatile products because there may be no time to recover from a loss.

The split of a portfolio across asset classes such as cash, bonds, equities, and alternatives. It is the main driver of a portfolio's long-term risk and return characteristics.

Spreading money across assets, sectors, issuers, and currencies so that a single adverse event does not dominate results. It reduces specific risk but cannot remove market-wide risk.

The danger of holding too large a share of a portfolio in one security, issuer, sector, or market. Losses in that single exposure can then overwhelm the client's overall financial position.

A written explanation of the key risks of a product or service given to the client before they commit. It should be specific to the instrument, in plain language, and acknowledged by the client.

A set period after a sale during which the client may cancel a product and recover the money, sometimes with a market-value adjustment. Its length and scope depend on the product and the distribution rules.

The firm's pre-approval review of a product's structure, issuer, fees, liquidity, and legal terms, plus ongoing monitoring. It establishes that the product is understood and appropriate before it reaches clients.

A check that a client understands the mechanics and risks of derivative products, such as margin calls, gearing, and potential loss beyond the initial amount. Passing it is often a precondition for trading those products.

A demand from a broker or counterparty for additional cash or collateral when the value of pledged assets falls below a required level. Failure to meet it can trigger forced liquidation of positions.

Using borrowed money or embedded gearing to control a position larger than the cash invested. It magnifies both gains and losses and increases the chance of a margin call or total loss.

The risk that an investment cannot be sold quickly at a fair price, or that the client cannot access funds when needed. It is especially relevant for long-tenor notes, private funds, and small-cap securities.

The risk that a bond issuer, bank, or counterparty fails to pay interest or principal as promised. For retail clients it matters most in bonds, deposits with weaker banks, and structured products with issuer exposure.

The risk of loss from movements in prices, interest rates, or exchange rates affecting the whole market rather than one issuer. Diversification cannot eliminate it, though asset allocation can moderate it.

The risk that exchange-rate movements reduce the value of a foreign-currency investment when converted back to the client's home currency. It applies even when the underlying asset price is unchanged.

Periodically adjusting holdings back to the target asset allocation after market moves have shifted the mix. It enforces a discipline of trimming winners and adding to laggards.

A written document setting out a client's objectives, constraints, target allocation, and review schedule. It gives the adviser and client an agreed reference point for future decisions.

The verification steps taken to confirm a client's identity, beneficial ownership, and source of funds, and to screen against sanctions and politically exposed person lists. It is repeated when risk indicators change.

The framework of laws, procedures, and monitoring designed to stop criminals from disguising the proceeds of crime as legitimate assets. It includes reporting suspicious activity and keeping transaction records.

A confidential report filed with the financial intelligence unit when a transaction or client behaviour suggests possible money laundering or terrorist financing. Staff who file it must not tip off the client.

An individual entrusted with a prominent public function, or a close associate or family member of one, who presents higher money-laundering risk. Enhanced due diligence and senior approval are required to onboard them.

Situations where the firm's or staff's own interests could improperly influence advice or dealing for a client, such as commission-driven sales or proprietary trading. They must be identified, disclosed, and managed.

A commission, rebate, or non-monetary benefit paid by a third party to the firm in connection with distributing a product. Rules require it to be disclosed and to enhance, not impair, the quality of service.

Clear presentation of all charges a client will pay, including subscription fees, management fees, and any commissions or trail payments. Charges should be shown in cash terms where possible.

The obligation to take all reasonable steps to obtain the best possible result for client orders, considering price, cost, speed, and likelihood of settlement. It does not guarantee the single best price available.

Retaining client instructions, suitability assessments, disclosures, and transaction records for the required retention period. Good records are the firm's main defence when a suitability decision is later challenged.

Holding client money and assets separately from the firm's own, usually in designated trust or custody accounts. It protects clients if the firm becomes insolvent.

The risk of loss when a third party holds a client's assets, through fraud, insolvency, or operational failure. Segregation and periodic reconciliation are the main mitigants.

A statistical measure of how closely two assets move together, ranging from minus one to plus one. Low or negative correlation is what makes diversification effective in reducing portfolio volatility.

The degree to which an investment's returns fluctuate over time, often measured by standard deviation. Higher volatility implies a wider range of possible outcomes and usually a higher product risk rating.