Most of the calls financial advisors receive from their compliance departments relate to issues of suitability, says Cheryl Hamilton, chief compliance officer at HUB Financial Inc. and HUB Capital Inc. in Woodbridge, Ont.
Compliance officials must focus on ensuring that advisors are meeting their obligations in providing investment products that are in line with clients’ levels of risk tolerance and goals.
So, here are three ways to help you determine client suitability:
1. Review KYC documents
One of your greatest tools in determining suitability is the information you have collected about your clients’ risk tolerance, investment objectives, income and net worth.
Look over the “know your client” (KYC) document prior to each client meeting to refresh your memory. Also, develop a habit of asking your clients if any significant changes have occurred in their lives.
Clients don’t always think to tell their advisors about health problems, a lost job or the birth of children, Hamilton says. A change in any one of these areas can affect your client’s profile.
2. Take good notes
“Advisors rely heavily on their trusted relationships with their clients,” Hamilton says. “In doing that, they don’t always document their discussions and their meetings to the extent we need them to.”
You should be taking notes that are detailed enough that a third party, such as a compliance official, can understand what decisions were made, and why. Describe your discussion with your client and any agreements made regarding risk, objectives and time horizon. Include why you and your client felt those agreements were appropriate at the time they were made and the date that the conversation took place.
If a compliance official is curious about a particular transaction, you will have a document stating why you and your client agreed on that step.
Notes can also benefit you greatly in the future if a client or a client’s relative questions any of your investment decisions. In fact, you may want to mail these notes to your client so he or she has a record as well.
This policy will help you protect yourself, Hamilton says, especially if you have clients who are seniors.
“If [notes] can keep you out of a regulatory or a civil issue,” she says, “that’s worth it’s weight in gold.”
3. Understand the consequences
Your compliance representative will make a note every time you are questioned on the suitability of an investment product. This record remains in the compliance system, even if the trade is not reversed, and the note is made accessible during any regulatory audit of your firm.
Therefore, when you work hard to ensure that investment decisions are in line with your client’s stated suitability, you are also preventing the possibility of a discussion with your regulatory body.
This is the first instalment in a two-part series on compliance.
Next: three more ways to prevent calls from compliance.