Wealth and Financial Advice: Suitability, Costs and Client Outcomes
What this domain tests
Wealth and Financial Advice tests whether advice is suitable, documented and fairly priced. Expect the Minimum Competency Code, MiFID II suitability, the Consumer Protection Code, PRIIPs disclosures, risk profiling and vulnerable-client handling.
Core rules
- Staff giving advice must meet Minimum Competency Code qualification and continuing professional development requirements.
- Suitability requires know-your-client information: objectives, time horizon, risk tolerance, capacity for loss, knowledge and experience. Capacity for loss is not the same as willingness to take risk.
- The suitability report must explain why the recommendation fits, including costs and disadvantages.
- Inducements must enhance quality and not impair the duty to act in the client's best interest; they must be disclosed.
- PRIIPs key information documents show a 1-7 risk indicator, costs and performance scenarios. Past performance is not a promise.
- Execution-only is allowed only where the client is appropriately informed and the product is suitable for that route.
Worked example
A 58-year-old client has €200,000, a five-year horizon and a medium-risk questionnaire score. A 60/40 portfolio could fall 20%, or €40,000. If the client cannot delay retirement, the capacity for loss is lower than the score suggests. The adviser recommends 40/60, documents the trade-off, shows the 1.2% annual cost and explains that the fund is not guaranteed. The file records the emergency fund and the reason for departing from the questionnaire result.
Traps
- Treating a risk questionnaire as capacity for loss.
- Relying on past returns.
- Recommending the cheapest product as automatically suitable.
- Blurring information with advice.