Client Suitability, Disclosure and the Advice Process
Legal and conduct duties
The FMC Act and the Code of Professional Conduct require advisers to treat clients fairly, act with integrity, give suitable advice and manage conflicts. A FAP must ensure its advisers are competent and properly supervised. Suitability is judged against the client's objectives, financial situation, risk tolerance, experience and needs. Advice must be recorded and reviewed.
Know your client
Gather information on income, assets, liabilities, dependants, time horizon, liquidity needs, tax position and prior derivatives experience. Derivatives are leveraged, so a client who cannot withstand a margin call is not suitable for futures. Options may suit a client who wants limited downside but can afford the premium.
Disclosure and records
Disclose fees, conflicts, product risks and the nature of the service. Distinguish advice from a sales recommendation. Keep records of the client information, the analysis, the recommendation and the client's instructions. If the client declines advice, record that too.
Worked example
A retired client wants capital protection and steady income but has limited liquidity. A leveraged futures strategy is unsuitable because margin calls could force liquidation. A protective put may be considered if the cost is acceptable, or the adviser may recommend no derivatives exposure. The reasoning is to match the product's risk to the client's capacity to bear loss.
Traps
Tick-box suitability; recommending a product because it is popular; failing to disclose commissions; giving advice outside competence; and not documenting the client's rejection of advice.