All dealers and advisors are required to abide by securities rules and regulations, and the requirements of their SRO. One of the most important requirements under the rules that you should be aware of is the advisor’s obligation to make investment recommendations that are suitable for their clients by performing a suitability assessment whenever:
- An advisor recommends a trade or accepts a trade instruction from you.
- A client moves to a new advisor or transfers assets to another dealer.
- There has been a material change in client circumstances, particularly where there has been a significant decrease to income or increase in expenses. For example, a job loss, retirement or divorce.
The requirement that all investment recommendations be suitable for the client, and to perform a suitability assessment at the above mentioned points in time, helps clients to maintain an investment portfolio that is in alignment with their risk tolerance, investment objectives and financial means. Additionally, the suitability obligation applies to the advisor’s dealer and the dealer must supervise the advisor’s activities for compliance with the suitability obligation.
There are several elements to performing a proper suitability assessment, and the main elements are set out below:
An advisor must know the essential facts and features of any mutual fund or investment product that is recommended to a client. This would include but is not limited to understanding the risks and costs associated with an investment.
An advisor must know the essential facts about a client. This should be done through a discussion with clients about investment needs and goals, capacity to withstand losses and attitude towards risk, among other factors. This discussion should form the basis for assisting clients in completing the information, often called Know-Your-Client Information or KYC Information, required on the new account application form. Further detail on the KYC Information required to open an account and why it must be provided is available in the Opening your Investment Account Information Sheet at www.mfda.ca/investors/brochure/ClientInfoSheet.pdf.
Explain features and risks
An advisor is expected to disclose material negative and positive factors involved in a recommended investment to the client for the purpose of assisting a client in making an informed decision about whether to proceed.
n addition to the suitability requirement, advisors have several other primary responsibilities which protect investors such as the duty to resolve any conflicts of interest having regard to the best interests of clients, the duty to deal fairly, honestly and in good faith with clients, and the requirement to report any client complaints to the dealer which has an obligation to deal with the complaint promptly and fairly.