Know your client rules: Protecting investors and advisors
As an advisor, before you can give financial advice or sell financial products, you have to learn several things about your clients. This is called the Know Your Client (KYC) rule, and it protects investors by ensuring any advice they receive or products they invest in are suitable for them. It also protects advisors by giving them a better idea of the advice, products and services they can offer each client.
What advisors need to know
As part of the KYC requirements, advisors must ask clients for some personal information, like their marital status, number of dependents, age and occupation.
Advisors must also ask about each client’s finances, including their annual income and net worth, as well as any investments they already have.
Then advisors will need more specific information about what each client hopes to achieve by working with their advisor. For example, advisors should ask about the client’s:
- investment objectives, or the financial goals they’re trying to reach, such as retirement or home ownership
- investment time horizon, or when they hope to reach each goal
- tolerance for risk, or how comfortable they are with short-term losses if it means the potential for higher long-term gains
- current level of financial knowledge
As an advisor, you’ll write the answers to all of these questions on a form, and then your client will sign the form to confirm the information is correct.
Changing clients’ information
Advise your clients to contact you should they experience a significant change in their life, like getting married, buying a house or changing jobs. Even if clients haven’t had any big changes, you may want to ask each client to update their KYC information and sign a new form every year.
It’s important to keep your clients’ KYC information up-to-date so that the advice they receive and the products you recommend are always suitable for each client’s needs.
Looking forward, advisors may have new suitability requirements to meet. They may be subject to greater disclosure requirements while also assuring that all investment recommendations are in their clients’ best interests, based on each client’s financial situation, risk profile and investment objectives.