In order to be able to recommend an investment product that is suitable for a client’s investments needs and objectives, a financial adviser is required to take reasonable steps to know his or her client. This is called the “Know Your Client” or “KYC” obligation.
KYC forms the basis for the suitability obligation, which also includes Know Your Product (KYP), that all investment advisers must follow under Nova Scotia securities law. The KYP obligation states that an adviser must know the structure and features of each investment product they are offering, including costs, and risks. The suitability obligation requires an adviser to take reasonable steps to ensure that any recommendation that he or she makes is suitable for the client. Under KYC, this means knowing certain specific information about each client, and may include the following:
- Investment needs and objectives
- Financial circumstances
- Risk tolerance
- Investment time horizon (When will the money invested be needed? For retirement or sooner?)
- Marital status and number of dependents
- Annual income
- Net worth
- Investment knowledge and experience
KYC information is vitally important for an adviser in order to be able to give suitable investment advice. How could someone give you correct investment advice without knowing your investment objectives? Or your investment time horizon? Or if you are risk adverse? The answer is, they can’t. That why KYC is so important and why an adviser must ask their clients the questions to get the necessary answers before delivering any advice.
The KYC obligation isn’t a one-time thing either. As people get older, things in their life change. They might get a new job or get married, or have kids. Life events like buying a house, going back to school or deciding when you plan to retire may affect the suitability of your investments. Because of these life changes, your adviser needs to check that your KYC information is up-to-date regularly. Clients should also make sure they update their adviser about life changes that could affect the suitability of their investments.