3 compliance commandments

Advisors have a duty to act fairly, honestly and in good faith with clients. To meet these obligations, they must know their clients, understand the products they sell them and ensure investments are suitable.

• Know your client (KYC)

Having clients complete a basic KYC form isn’t enough. Make detailed notes about client discussions to help protect you in case of dispute. CSA lets you accept client statements at face value unless you have good reason for doubt; so for instance, if a client has significantly more money than you’d expect given where he works, you need to discover and document where the money’s coming from.

Formulate a supplemental questionnaire with specific queries about the client’s financial picture, his goals and his risk tolerance. This will help ensure you aren’t missing any major details; it will also help determine if a trade is suitable. Knowing how much money they need, and by when, will assist in choosing the right investments. Asking a client how concerned they would be if an investment dropped in value by 20% over a six-month period will give a better picture of how much risk they really could withstand.

• Know your product (KYP)

Advisors must understand the products they sell. Review offering documents and marketing materials to ensure they meet regulatory requirements. Do a risk and cost assessment in comparison with similar products to determine if it has a reasonable prospect of meeting client objectives and to see if other products are less costly or risky. You can use third-party analysis, but this doesn’t replace an internal review.

• Suitability

The products you recommend must be suitable for clients. This is particularly important for firms dealing in prospectus-exempt offerings, because they are typically more illiquid and may have to be held for longer. Firms must ensure they’re putting client interests first. And just because a client is eligible for an investment doesn’t mean it’s suitable.

Read more: THREE COMPLIANCE COMMANDMENTS TO OBEY