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kyc for financial advisors

The Know Your Client (KYC) questionnaire is one of the primary tools used by advisors to determine the suitability of investments made on behalf clients, based on their unique investment objectives and risk profile.

It is a regulatory requirement which must be completed by all new clients and updated whenever their personal circumstances.  

know your clients

From the advisor’s perspective, the information provided on a completed KYC form justifies the suitability of the investment recommendations made on behalf of the client. Typically, advisors use the information provided by clients to classify them as growth, balanced or conservative investors.

The accuracy of information provided by clients is therefore of paramount importance. However, it must be noted that clients have unique characteristics and personal situations that are not covered in the KYC document. Therefore, it is necessary for advisors to collect as much information as possible about clients during the discovery process. 

Here are some of the key attributes of the KYC process.  

1. Identify Investment Goals

The KYC form asks questions about client’s age, income, net-worth, time-horizon and investment goals. While information about clients’ age, net worth and income is verifiable, it is important for clients to be able to accurately state their investment objectives and time horizon.  Answering these questions often involves personal judgement on part of the client but their answers must be concise.  

2. Evaluate Investment Knowledge

Another question on the KYC is clients’ knowledge of and experience with investments. While the answer to this question should be straightforward, research shows that many clients tend to overestimate their investment knowledge. Doing this, however, can give advisors a false impression that clients are aware of any potential product recommendations. Therefore, clients should be as honest as possible about their knowledge of and experience with investments.

3. Assess Risk Tolerance

The question about clients’ ability to take on risk is usually fraught with challenges. This is especially true when the markets are doing well and clients are relatively more optimistic about making gains. In reality, research shows that most clients are more risk averse than they usually believe. Their aversion to risk becomes evident when the markets are not doing well. The KYC question which attempts to determine this is related to how much of a loss in investments can clients stomach, usually expressed in both percentage and dollar terms.

4. Investment Suitability

Advisors have a fiduciary responsibility to determine the suitability of all investment made in a client’s account. This assessment is based on more than the client’s answers to the KYC questions. That is why clients must have a detailed discussion about their investment profile, instead of just ticking off boxes on the questionnaire.

5. Advisor Responsibility

Advisors are expected to gather sufficient information about their clients. Clients typically expect them to ask them questions about their objectives, risk tolerance and other concerns because KYC questionnaire does not cover sufficient ground. It pigeon-holes clients into boxes.

Not asking sufficient questions can raise red flags with some clients. They might question whether you should know more about them — and whether you know what you are doing. Advisors have a responsibility to know their clients and to ensure that the risks and features of the investments they recommend are suitable for their clients’ needs.

There are more tips and tricks for financial advisors in our blog section. Also, don’t forget to see the list of recommended books for financial advisors.

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