Client advisory and ethics
Client advisory and ethics tests suitability, disclosure, conflicts of interest, and fiduciary or conduct standards. The exam rewards the client-first answer supported by evidence, not the highest-return recommendation.
Suitability and capacity
- Know the client: objectives, horizon, liquidity needs, existing holdings, tax position, risk tolerance, and risk capacity.
- Risk tolerance is willingness; risk capacity is ability to absorb loss. A high tolerance does not cure a short horizon or a critical cash need.
- Suitability requires a reasonable basis for the recommendation and documentation of why it fits.
Conflicts and disclosure
Conflicts include commissions, proprietary products, and performance fees. Disclose them clearly, manage them, or avoid them; disclosure alone does not neutralize a harmful conflict. Fiduciary duty generally requires loyalty and prudence; a suitability standard is narrower.
Worked example
A 62-year-old client needs 200,000 in two years for a property purchase but says she is comfortable with volatility. A 90% equity portfolio has historically higher expected return, but a 30% drawdown would leave about 140,000 and jeopardize the goal. The recommendation should prioritize capital preservation, such as a short-duration bond or cash ladder, and explain the lower expected return. The client's willingness does not override her capacity.
Traps
Chasing past performance; treating a signed risk questionnaire as conclusive; hiding fees in net returns; promising guaranteed returns; recommending a complex product without explaining liquidity and exit costs.