Mutual Funds Suitability Assessment Quiz

Suitability Requirements

• BCO responsibility: Ensure sales representatives understand all the mutual funds the dealer offers, including proprietary and third-party products.
• Weekly sales meetings: Used to keep sales representatives informed.
• Determining suitability for clients:
  • Step 1: Identify client's investment objectives and goals.
  • Step 2: Measure the client's risk capacity based on financial information like income, assets, and debt.
  • Step 3: Construct a suitable portfolio mix using model portfolios.
  • Step 4: Revise existing portfolio by identifying funds to sell and purchase.
  • Step 5: Evaluate portfolio performance against a benchmark.
• Redemption orders:
  • Suitability: Applies to the overall portfolio, not just individual funds.
  • Redemption order impact: Examine the impact on asset allocation.
  • Unsuitable asset allocation: Client must sign an undertaking acknowledging the order was unsolicited and not recommended.
  • Unsuitable and unacceptable asset allocation: Order request must be refused.
  • Client options: Change asset allocation, withdraw the request, or close the account.

Reasonability

• Acceptable order: May place a client's asset allocation outside the dealer's model, but still be considered reasonable based on the client's risk profile, knowledge, time horizon, and objectives.
• Qualitativve aspect of reasonability: Focuses on client's profile and investment goals.
• Unreasonable trade: Should be refused, even if the client insists.
• Distinguishing acceptable and unacceptable trades: Important for BCOs.
• Unsolicited orders: Orders initiated by clients may be unsuitable or unacceptable.
• Sales representative responsibilities:
  • Never solicit unsuitable or unacceptable orders.
  • Never approve unacceptable orders, even if it's inconvenient.
  • Caution clients about unsuitable orders and possibly unacceptable ones.
• Client undertaking: If a client insists on proceeding with an unsuitable order, the dealer may require the client to sign an undertaking.
• Unacceptable trades: Must be refused, following the dealer's procedures.

Solicited Orders

• Suitability for solicited orders: Ensure orders are suitable for the client's financial situation, investment knowledge, risk profile, time horizon, and objectives.
• Asset allocation model: Orders should conform to the dealer's asset allocation model.
• Leverage: Client's decision, but it's the BCO's responsibility to ensure they are fully informed about the risks.
• Undue or excessive leverage: No specific laws define acceptable leverage amounts, which must be decided on a case-by-case basis.
• Leveraged transaction impact: Examine the overall impact on asset allocation.
• Unsuitable leveraged transaction: Client should be cautioned and an undertaking obtained.
• Unreasonable leveraged transaction: Should be refused.

KYC and Leverage

• Leverage and investment knowledge: Leveraged strategies are not suitable for clients with low investment knowledge.
• Leverage and risk profile: Only recommend or accept leveraged strategies for clients with medium or high risk profiles.
• Leverage and age: Leveraged strategies are generally long-term investments. BCO and sales representatives should carefully examine the trade for older clients with a goal of capital preservation.
• Leverage and time horizon: Leveraged strategies are more suitable for clients with long-term horizons, while review and investigation are required for clients with less than a five-year horizon.
• Leverage and net worth: Clients should have sufficient net worth to sustain leverage and the associated risks. Review and investigation should be conducted if leverage exceeds 30% of the client's total net worth.
• Leverage and income: Clients' income must be sufficient to maintain debt payments. Total debt and lease payments should not exceed 35% of gross income, excluding leveraged investment income.

Suitability and Reasonableness

• Sales representative responsibility: Ensure purchases are suitable and reasonable.
• Periodic checks: Dealers should have procedures for performing periodic checks to ensure compliance with suitability requirements.
• Relationship databases: Dealers may use relationship databases or electronic systems for supervision.
• BCO awareness: Be aware of the dealer's requirements for maintaining evidence of supervision.
• Client responsibility: Sales representatives cannot avoid suitability requirements by transferring responsibility to the client.

Test your understanding of suitability requirements for mutual funds and the process of determining appropriate investment strategies for clients. This quiz covers the essential steps in assessing client goals, risk capacity, and portfolio construction. Evaluate your knowledge on redemption orders and their impact on asset allocation.