Canadian Investment Funds Course Suitability PDF
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Uploaded by TopQualityErbium
2021
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This document is a learning resource on the topic of investment fund suitability. It includes detailed information on the Know Your Client (KYC), Know Your Product (KYP), and suitability processes. The document also covers the considerations for dealing with older and vulnerable clients.
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Canadian Investment Funds Course Unit 3: Know Your Client, Know Your Product, and Suitability Introduction As a Dealing Representative, you need to follow a rigorous process to determine which products are suitable for your client. This unit describes the suitability requirement and the steps that y...
Canadian Investment Funds Course Unit 3: Know Your Client, Know Your Product, and Suitability Introduction As a Dealing Representative, you need to follow a rigorous process to determine which products are suitable for your client. This unit describes the suitability requirement and the steps that you must take to ensure that you are making suitable recommendations. This unit take approximately 1 hour and 30 minutes to complete. Lessons in this unit: Lesson 1: Overview of the Suitability Process Lesson 2: Know Your Client (KYC) Lesson 3: Know Your Product (KYP) Lesson 4: Suitability Lesson 5: Strategic Investment Planning Lesson 6: Dealing with Older and Vulnerable Clients © 2021 IFSE Institute 79 Unit 3: Know Your Client, Know Your Product, and Suitability Lesson 1: Overview of the Suitability Process Introduction Dealing Representatives are obligated to ensure that orders they accept, recommendations they make, and other investment actions they take are suitable for their clients. This lesson takes approximately 10 minutes to complete. This lesson takes approximately 5 minutes to complete. By the end of this lesson, you will be able to: explain the obligations in the suitability process define Know Your Client (KYC) define Know Your Product (KYP) define suitability 80 © 2021 IFSE Institute Canadian Investment Funds Course What is the Suitability Requirement? As a Dealing Representative, you have a regulatory obligation to know the client, know the product, and to form an opinion as to whether the investment product or strategy is suitable for the client. When you are considering offering or recommending an investment product or investment strategy to a client, you are obligated to first: learn the essential facts about the client learn the essential facts about the investment product and/or investment strategy determine whether the investment product and/or investment strategy is suitable for the client 1. Know Your Client (KYC) 3. Suitability Determination 2. Know Your Product (KYP) The Know Your Client (KYC), Know Your Product (KYP), and suitability obligations are among the most fundamental obligations in securities regulation. These requirements play a central role in the protection of investors. As a Dealing Representative, the KYC, KYP, and suitability obligations are your primary obligations to your clients along with your obligation to deal fairly, honestly, and in good faith with clients. Under the obligation, you must ensure that each order you accept and each recommendation you make for any account of a client is suitable for the client. You must diligently carry out each of the 3 steps in the suitability process and be able to evidence that you did so. This brings us to the fourth step, which is to document everything that you do in writing, either on paper or in a computer document. You should do this concurrently with the other steps. In other words, you should document every action as you perform it. Documentation is essential for the following reasons: It protects you from disciplinary or regulatory action. Documentation provides a trail of your actions and enables your Branch Manager, your dealer’s Compliance Department, and possibly the MFDA’s inspectors to satisfy themselves that you complied with the suitability requirement. It protects you from allegations the client can bring against you. If a client makes money, they will not likely complain. However, if a client loses money as the result of a trade, they may complain or even sue. In such cases, the documentary trail you retain will be the best evidence to show that you acted diligently. © 2021 IFSE Institute 81 Unit 3: Know Your Client, Know Your Product, and Suitability You are required to document the reasonable basis for your suitability determinations and how you have met your obligation to put the client’s interest first. Example Your client, Tim, is 72 years old. His investment needs and objectives are to earn income and preserve his capital, and he has $100,000 to invest over a five-year time horizon. Tim has a risk profile of low. You have performed due diligence in researching the different products. Based on Tim’s investment needs and objectives and other KYC criteria, you recommend a portfolio of fixed income products matching the five-year time horizon that will provide Tim with a regular flow of income, without risking depreciation in his portfolio. There are no investment products which are suitable or unsuitable in general terms. Suitability is determined only when viewed against a given client’s KYC information, the product’s KYP information, and determining what option is best for client. The fixed income products recommended in the example above match the client’s investment needs and objectives, risk profile, time horizon, and other essential criteria identified in the KYC process. When considering the best option for the client, you have an obligation to put the client’s interests first when making your suitability determination. IMPORTANT NOTE: The suitability rule is not satisfied merely by disclosing to the client the risks involved with an investment product or strategy. Disclosure of an investment’s risk does not, in any way, negate your obligation to Know Your Client, Know Your Product, and make an appropriate suitability determination. 82 © 2021 IFSE Institute Canadian Investment Funds Course Lesson 2: Know Your Client (KYC) Introduction As a Dealing Representative, you have a responsibility to collect and consider essential information about your clients in order to fulfill your suitability obligation. The basis for gathering this information is the Know Your Client (KYC) rule. KYC is step 1 in the suitability process. This lesson takes approximately 40 minutes to complete. By the end of this lesson you will be able to: discuss the Know Your Client (KYC) obligation discuss completion of the New Client Application Form (NCAF)/Know Your Client (KYC) Form explain identification requirements explain personal circumstances explain financial circumstances explain investment needs and objectives explain investment knowledge explain risk profile explain time horizon discuss client specific KYC and KYC for multiple accounts and joint accounts discuss new account review and approval explain KYC confirmation discuss KYC updates © 2021 IFSE Institute 83 Unit 3: Know Your Client, Know Your Product, and Suitability What is Know Your Client? The objective of the Know Your Client (KYC) rule is to ensure that the essential facts about a client are known so that the information can form a basis for determining whether investment recommendations will be suitable for them. Under the KYC rule, it is your responsibility to collect and consider essential information about your clients in order to ensure that they are well served by investments that suit their individual financial needs. Step 1: Know Your Client (KYC) Under the KYC obligation, you are required to collect and consider essential information about your clients, as set out in Mutual Fund Dealers Association of Canada (MFDA) Rule 2.2.1, Know Your Client. In order to satisfy your KYC obligation, you are expected to take reasonable steps to: establish the identity of the client ensure that you collect and consider sufficient information about the client's: - personal circumstances - financial circumstances - investment needs and 1. Know Your Client (KYC) objectives - investment knowledge - risk profile 3. Suitability Determination 2. Know Your Product (KYP) - time horizon You are also required to collect important information as required under other laws and regulations including legislation governing tax reporting, Proceeds of Crime (Money Laundering) and Terrorist Financing, and privacy. Why Gather KYC Information? The KYC, KYP, and suitability obligations are the most fundamental and important duties of every Dealing Representative. Knowing your client is not merely checking boxes on a form; it involves having meaningful conversations with your clients that allow you to truly know and understand their means, needs, limitations, circumstances, finances, and investment goals. Otherwise, you will not be able to make suitable recommendations or provide adequate service to your clients. 84 © 2021 IFSE Institute Canadian Investment Funds Course Example John, a Dealing Representative, has two clients: 1. Thomas is a 30-year-old bank manager with an annual income of $75,000. He is interested in growth-oriented products, has a 35-year time horizon, and high risk profile. 2. Martha, 65 years old, has just retired. She is interested in capital preservation and incomegenerating products. She has a 7-year time horizon and low risk profile. Recommending high-risk funds may be suitable for Thomas, but unsuitable for Martha. Your KYC Responsibilities Under regulatory requirements, you are expected to: have a meaningful interaction with the client during your KYC process discuss with the client their role in keeping KYC information current tailor the KYC process to reflect the nature of the relationship with the client - For example, the regulators expect that extensive KYC information will be required if you are offering an ongoing and fully customized service or an investment product or strategy that is illiquid or highly risky. The regulators expect you to help your clients understand KYC terminology, inquire about any noted KYC responses which appear inconsistent, and provide assistance to help clients define their investment needs and objectives. You are expected to be particularly conscientious in your KYC discussions with vulnerable or unsophisticated clients. The KYC requirement is an ongoing obligation. It does not end after the initial KYC is recorded and considered when the new account is opened. You are responsible for periodically reviewing and updating the KYC information on file for your clients. The KYC obligation cannot be delegated, for example to a third party such as a referral agent. New Client Application Form (NCAF) The KYC process starts with the New Client Application Form (NCAF) which must be completed for each new client account that is opened. Complete KYC information must be collected when new accounts are opened and must be documented in the NCAF, also referred to as the KYC Form. © 2021 IFSE Institute 85 Unit 3: Know Your Client, Know Your Product, and Suitability In cases of disputes, the KYC Form will customarily be reviewed by regulators and lawyers to ascertain whether you knew the client and recommended suitable investments. However, investigation into suitability disputes will go beyond the information that is collected on the KYC Form, specifically if the information on the form appears unreasonable given the client's circumstances. The NCAF/KYC Form should be completed, signed, dated, and then reviewed and approved by your dealer. The client should receive a signed copy of the NCAF/KYC Form for their records. Dealer approval by a designated officer, partner, director, or Branch Manager should be completed no later than one business day after the initial transaction in the account. KYC Information In order to collect the necessary KYC information, most NCAF/KYC Forms include the following sections: identification personal circumstances financial circumstances investment needs and objectives investment knowledge risk profile time horizon Identification Under the KYC obligation, you have a duty to establish the identity of each client. Where there is any cause for concern, you are required to make reasonable inquiries as to the reputation of the client. Under Companion Policy (CP) 31-103, s. 13.2, the regulators establish their expectations of registered firms and Dealing Representatives in their role as “gatekeepers” to the capital market. As part of their gatekeeper role, firms and Dealing Representatives: are required to establish the identity of, and conduct due diligence on, their clients should not, by act or omission, facilitate conduct that brings the market into disrepute These obligations to establish and confirm a client's identity are synonymous with the legislation under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). 86 © 2021 IFSE Institute Canadian Investment Funds Course Personal Circumstances The obligation to learn the essential facts about each client includes learning about their personal circumstances. A client’s personal circumstances have an impact on their investment needs and include those elements below. Personal Circumstances age, date of birth address and contact information civil status/family situation (e.g. marital status) number of dependents other persons who are authorized to provide instructions on the account other persons who have a financial interest in the account For clients who are not individuals, the KYC information below must be collected and replaces the Personal Circumstances section above for individual clients. KYC for Clients who are not Individuals legal name head office address and contact information type of legal entity (i.e. corporation, trust, etc.) form and details regarding the organization of the legal entity (i.e. articles of incorporation, trust deed, other constating documents) nature of business persons authorized to provide instructions on the account details of any restrictions on the authority of the persons authorized other parties who have a financial interest in the account Age A client’s age, in particular, is important for several reasons: There is a legal age of majority in each province. Agreements, including the purchase of mutual funds and other securities, entered into by people who are not of legal age may not be enforceable. © 2021 IFSE Institute 87 Unit 3: Know Your Client, Know Your Product, and Suitability There are age restrictions for certain accounts, such as Registered Education Savings Plans (RESPs) and Registered Retirement Savings Plans (RRSPs). Your client’s age ties in closely with his or her short-, medium- and long-term financial goals. For instance, a 25-year-old single man with 40 years until retirement will likely have different investment needs and objectives and risk profile than a man of 60 who is approaching retirement. Financial Circumstances The client’s financial circumstances are a key component of the client’s KYC information and includes those elements below. Financial Circumstances employment status and occupation annual income net worth financial assets and liquid assets liquidity needs whether the client is using leverage or is borrowing to invest creditworthiness Employment Status and Occupation Occupation and employment status are important factors when assessing suitability. For example, clients who are retired and living on a fixed income will have different objectives than those in their high-income earning years. In addition, some clients may have cyclical jobs or may be paid by commission. In these cases, their income may vary dramatically from year to year. It is important to recognize the potential gaps in clients' income and work with them to meet both short-term liquidity needs and longer-term investment requirements. Income Annual income is critical to assessing an individual's financial condition and can be an indicator of whether they can withstand volatility or loss. Generally, clients with a low income are expected to have a lower risk profile, a higher need to preserve their principal, and increased liquidity requirements because significant life events (losing a job, buying a house, etc.) may result in the need to depend on their investments. 88 © 2021 IFSE Institute Canadian Investment Funds Course For example, if the client will depend on the income generated by their investments to live on, then their financial circumstances would likely not allow for exposure to the potential losses from higher risk securities. It would also not be generally suitable for a client with a low income to be invested through a leveraging strategy. On the other hand, a client earning $100,000 from employment with a healthy net worth would likely be less affected by a loss. Annual income should include income from all relevant sources and should be collected as a number or by using reasonable ranges. Income is commonly recorded in ranges on the KYC Form as illustrated below. Income o o o o o $300K Net Worth Net worth denotes wealth and is critical in assessing a client’s financial condition. Knowing a client’s net worth helps you to determine the client’s resources and ability to invest, as well as any tax implications that may affect investment choices. At higher levels of net worth, reducing tax exposure is often a priority. As with any tax-driven investment or strategy, investors should consult with a qualified tax professional to determine if the tax benefit is appropriate for them Net worth should be calculated as the estimated liquid assets plus fixed assets less estimated liabilities. Net worth should only include assets of the client and his or her spouse. Net Worth (Liquid Assets + Fixed Assets) - Liabilities = Net Worth You should have a detailed view of the client’s net worth in order to be able to recommend suitable products. The regulators expect you to take reasonable steps to obtain a breakdown of financial assets, including capturing information about the client’s investments held outside of the dealer, in order to assess overconcentration. Net worth, along with all other KYC factors including income, risk profile, and age, are particularly important factors to consider when reviewing whether a leveraging strategy is appropriate for a client. © 2021 IFSE Institute 89 Unit 3: Know Your Client, Know Your Product, and Suitability For leveraged accounts, you must record the details of the net worth calculations, specifying: liquid assets: cash, investments fixed assets: residence, real estate liabilities: debts, mortgages, loans, credit cards Net worth is commonly recorded in ranges on the KYC Form as illustrated below. Net Worth o o o o o o $1M Example Your client, Cheri Jones, has a net worth of $10 million. She is interested in reducing the amount of tax she is required to pay. Example An investor wishes to purchase high-risk speculative investments. However, his financial situation indicates that he is not in a position to tolerate the potential losses from such an investment. As a Dealing Representative, you have an obligation to discourage the client from selecting investments that may have a material negative impact on his financial situation. Liquidity Liquidity needs are an important aspect of a client’s financial circumstances. Ascertaining a client’s liquidity needs includes determining: the extent to which a client wishes or needs to access all or a portion of their investments to meet their ongoing and short-term expenses 90 © 2021 IFSE Institute Canadian Investment Funds Course financial obligations or major planned expenditures whether the client has any other means to cover their expenditures the frequency of any required withdrawals Leverage You are required to determine whether a client will use leverage or borrow to invest and collect and compute additional information about their financial circumstances in order to determine whether leverage will be suitable including: net worth liquid net worth total debt service ratio (TDSR) percentage of net worth (%NW) The purpose of collecting this additional financial criteria is to assess the client’s ability to meet debt obligations and to assess whether leveraged investing will be suitable for the client. Investment Needs & Objectives The investment needs and objectives and risk profile of a client are the most critical criteria in assessing whether an investment or investment strategy is suitable for a client. The client's investment needs and objectives define the ultimate goal that the client has for the invested capital and the result they aspire to achieve with the investment. Investment needs and objectives are often categorized as follows: Investment Needs and Objectives Need/ Objective Safety © 2021 IFSE Institute Description Investments Investors seeking safety have an objective to preserve their principal investment and are less concerned with capital appreciation. Investment selection could include cash, guaranteed investment certificates (GICs), and money market investments. 91 Unit 3: Know Your Client, Know Your Product, and Suitability Investment Needs and Objectives Need/ Objective Description Investments Income Investors seeking income have an objective to generate current income from their investments and are less concerned with capital appreciation. Investment selection should include securities that will generate a regular stream of income such as fixed income and money market investments. Balanced Investors seeking a balanced investment Investment selection should typically have an objective to seek a combination of include at least 40% in fixed income income and growth. investments and no more than 60% in equity investments. Growth Investors seeking growth have an objective to achieve capital appreciation from their investments and are less concerned with generating current income or preserving the safety of their principal. Investments could include those that invest in equities including Canadian dividend, Canadian equity, US equity, certain international equity, and Canadian small cap equity investments. Speculation Investors seeking to speculate have an objective to achieve maximum returns and are willing to take on a high level of risk in exchange for the return they hope to achieve. Investments could include sector and specialized investments such as those invested in emerging markets, science and technology, natural resources, and precious metals, and investments that engage in venture capital and speculative trading strategies such as laboursponsored venture capital funds, alternative mutual funds, and hedge funds. Clients may have multiple objectives, for example, income and growth. In such cases, you must be able to identify the relative importance of each objective within the account. Most dealers accommodate this by offering a KYC Form that allows the investment needs and objectives to be recorded in percentages. As set out in CP 31-103, s. 13.2, when determining a client’s investment needs and objectives, the regulators expect you to provide clients with the opportunity to express their investment needs and objectives in nontechnical terms that are meaningful to them, for example: save for retirement increase wealth by a certain percentage in a specific number of years invest for the purchase of a home 92 © 2021 IFSE Institute Canadian Investment Funds Course invest for the post-secondary education of children The CP goes on to state: “Depending on the nature of the relationship with the client, and the securities and services offered by the registrant, it may be appropriate to set out investment goals for a client’s account or portfolio which may be done by developing an investment policy statement. Where investment goals are agreed upon with a client, they should be set out in terms that are specific and measurable. A registrant should consider setting out investment return assumptions that would be required to meet the client’s investment needs and objectives. A registrant should also periodically update the client on progress towards any goals set for their account or portfolio.” Investment Knowledge Investment knowledge reflects the client's comprehension about investments and investing including their understanding about the: financial markets the relative risks and limitations of various types of investments, and how the level of risk taken affects potential returns You are expected to learn about your client’s level of awareness and previous experiences with finances and investments. Specifically, you should be alert where investment knowledge flags inconsistencies with other KYC criteria, for example where a client indicates that they have limited investment knowledge and experience, but also indicate that they have a high-risk profile. Investment experience reflects how much investing the client has done previously and the nature and complexity of those investments. Investment experience is not the same as investment knowledge. You cannot assume that because a client has previous investment experience that they have investment knowledge. Some clients may know a great deal about investing and various types of investments without ever having made investments. Other clients may know very little, despite having numerous previous investments. Becoming familiar with your client’s level of investment knowledge helps you to determine the types of investments you might recommend. investment knowledge is a particularly important factor to consider when determining whether higher risk investment products or leverage are appropriate for a client. The more complex or the higher the risk of the investment or strategy, the more sophisticated the client should be. Investment experience is usually recorded on the KYC Form in a section where the client's previous investments can be listed or checked off using tick boxes. Investment knowledge is commonly recorded by selecting from a list of options on the KYC Form as illustrated below. © 2021 IFSE Institute 93 Unit 3: Know Your Client, Know Your Product, and Suitability Investment Knowledge Definition The client's knowledge about investments and investing Options o Novice (Low) o Fair (Average) o Good (Above Average) o Sophisticated (High) Risk Profile When determining the suitability of an investment product or investment strategy for a client, perhaps the most important factor is the client's risk profile. Along with investment needs and objectives, risk profile is the most important key component of the client’s KYC. Establishing a client’s risk profile involves the determination of two (2) criteria: 1. The client’s risk tolerance: the client’s willingness to accept risk 2. The client’s risk capacity: the client’s ability to endure potential financial loss Risk tolerance and risk capacity are separate considerations that together make up the client’s overall risk profile. The client’s risk profile should reflect: the lower of: (1) the client’s risk tolerance and (2) the client’s risk capacity Assessing a client’s risk capacity requires you to have an understanding about the client’s personal and financial circumstances, investment needs and objectives, and other KYC criteria that would impact their ability to sustain investment losses. When assessing a client’s risk capacity, you should consider the client’s: liquidity needs debts income assets the weighting of the client’s investment(s) in relation to their overall financial position age life stage A client’s risk profile changes with age, employment status, income, investment knowledge, marital status, and other priorities in life. 94 © 2021 IFSE Institute Canadian Investment Funds Course Example Jim is 35 years old, married with two children, and has an annual income of $80,000. His risk profile is reported as “high”. If Jim loses his job, with the resulting loss of income, his risk profile will likely change. It is important that you do not confuse risk profile with other KYC criteria such as income, net worth, and time horizon. While you should consider these criteria and discuss them with your clients to assist them in understanding risk and return, the criteria should not override the client's final assessment of their actual willingness and ability to accept risk. Consider, for example, a client who may be very affluent but loses sleep when his publicly listed stocks are volatile causing him to panic and sell at the wrong time. The regulators expect you to document the questions and answers you use to establish your clients’ risk profiles. Assessing a client’s risk profile is sometimes determined by using tools such as questionnaires. You should be fully aware of the questionnaires approved by your dealer and follow your firm’s policies and procedures for determining risk profile. Dealers are expected to have definitions related to risk profile. Some mutual fund dealers have 3 levels: Low, Medium, and High. Other dealers have 5 levels: Low, Low-Medium, Medium, Medium-High, and High. The definitions for risk profiles will be established in the firm’s policies and procedures and Relationship Disclosure Information (RDI). Generally, the summary in the table below is true. Risk Profile Risk Profile Description Investments Low The low risk rating applies to investors who are risk averse and are willing to accept lower returns in order to preserve their principal. Investments under the low risk rating include assets with low volatility including cash and equivalents, GICs, and money market investments. Low-Medium The low-medium risk rating applies to investors who are seeking a balance between safety and return on their investment. Investments under the low-medium risk rating include investments with a low to medium volatility and may include fixed income investments or balanced investment funds. © 2021 IFSE Institute 95 Unit 3: Know Your Client, Know Your Product, and Suitability Risk Profile Risk Profile Description Investments Medium The medium risk rating applies to investors who are seeking moderate growth over a longer period of time. Investments under the medium risk rating include investments with medium volatility and may include investments in blue chip and mid cap equities such as Canadian dividend, Canadian equity, U.S. equity, and certain international equity investments. Medium-High The medium-high risk rating applies to investors who are seeking long-term growth. Investments under the medium-high risk rating include investments with medium to high volatility and may include those that invest in smaller companies, such as Canadian small cap equities, and specific market sectors or geographic areas. High The high risk rating applies to investors who are growth oriented and are willing to accept significant short-term fluctuations in portfolio value in exchange for potentially higher returns. Investments under the high risk rating include investments with high volatility and may include those that invest in specific market sectors or geographic areas such as emerging markets, science and technology, natural resources, and precious metals, laboursponsored venture capital funds, or those that engage in speculative trading strategies including alternative mutual funds and hedge funds that invest in derivatives, short sell, or use leverage. Like investment needs and objectives, risk profiles are often expressed in percentages which are recorded on the client’s KYC Form/NCAF. Once you have determined your client’s risk profile, you will record it into the KYC Form/NCAF. Risk versus Return Conflicts You should be aware that, in some cases, there will be a mismatch between the risk a client is willing or able to accept and the return the client expects. Higher expected returns come with inherently higher risk. Under these circumstances, you may be tempted to assess a higher risk profile than you should in an attempt to meet the client’s return expectations. Resist this temptation. 96 © 2021 IFSE Institute Canadian Investment Funds Course Where a client’s desire for returns does not align with their risk profile, you are expected to follow prescribed steps to protect the client from assuming too much risk, as set out in CP 31-103, s. 13.2. Resolving conflicts between a client’s expectations and risk profile As set out in CP 31-103, s. 13.2: “Registrants should not override the risk a client is willing and able to accept on the basis that the client’s expectations for returns cannot otherwise be met given the risk profile associated with their KYC responses. The registrant should identify any mismatches between the client’s investment needs and objectives, risk tolerance and capacity for loss. The questions at the source of this conflict should be revisited with the client. If a client’s goals or return objectives cannot be achieved without taking greater risk than they are able or willing to accept, alternatives should be clearly explained such as saving more, spending less or retiring later. Where after discussion, it is determined that the client does not have the capacity or tolerance to sustain the potential losses and volatility associated with a higher risk portfolio, the registrant should explain to the client that their need or expectation for a higher return cannot realistically be met, and as a result, the higher risk portfolio is unsuitable. The interaction with the client and end results should be properly documented.” Example Janice is a single mother of two children, ages 4 and 6. She has meagre savings of $20,000 and works two part-time jobs to make ends meet. So far, Janice has preferred to place her savings in fixed income products with low risk. However, extremely low rates of interest are providing her with a very low rate of return on her savings. She realizes that higher-yields will be possible only if she places her savings in higher risk investments. During her meeting with you, she expresses an interest in amending her risk profile level to “high”. Although Janice says she is comfortable with high risk, her ability to sustain the loss of her savings is still very low. You should advise her to keep her risk profile as low. Assessing Risk Profile Errors in correctly assessing a client’s risk profile can result in significant consequences including client complaints, enforcement proceedings, and legal action. One of the most common allegations made in client complaints to the MFDA is that the assessment of the client’s risk profile was incorrect. Clients allege that the risk profile indicated on the KYC form was higher than that which the client asserts is his or her actual risk profile. You may face disciplinary action if you make an inappropriate recommendation for a client’s risk profile level. For these reasons, it is critical that you make a diligent effort to determine your clients’ risk tolerance, risk © 2021 IFSE Institute 97 Unit 3: Know Your Client, Know Your Product, and Suitability capacity, and their resulting risk profile and retain documented evidence of how you came to your risk profile determinations. It is also important that you do not substitute your own judgment for that of the client when it comes to risk profile. If the client is not comfortable with a certain level of risk, the KYC should reflect that decision. Time Horizon Time Horizon is the period from the initial investment to when the client may need access to a significant portion of the money invested. Time horizon refers to the length of time the client will hold the investment before they will need to liquidate it and access the funds. Time horizon can range from short to long periods and will depend on the client's individual objectives. Time horizon is customarily recorded in ranges on the KYC Form similar to the ranges in the table below. Time Horizon Definition The time from the purchase to the time when the client will need to access a significant portion of the money invested Options < 1 Year (Short-Term) 1 - 3 Years (Short-Term to Medium) 3 - 5 Years (Medium) 5