Does Your Financial Advisor Really Know You? Why KYC Is More Than a Form

What Do Risk Tolerance and Risk Capacity Mean?

Your risk profile should consider both your willingness to accept investment risk and your financial capacity to withstand a loss. An advisor should explore how you understand risk and assess your capacity using your financial circumstances, rather than simply recording a label from a form.

Consider a question such as:

• Are you a low-, medium- or high-risk investor?

For many investors, that is surprisingly difficult to answer. What does “medium” risk actually feel like? An investor might say they are conservative while also expecting unusually high investment returns. Those answers may not fit comfortably together. That inconsistency should not simply produce a score on a questionnaire. It should lead to another conversation.

An advisor might explore questions such as:

• What would you do if your portfolio fell significantly?
• Have you lost money investing before?
• How did you react?
• When will you need this money?
• How important is preserving your capital?
• Would a significant decline change your retirement plans?
• What other financial resources do you have?

The objective is not to get the investor to provide the “right” answer. It is to understand the person sufficiently well to give appropriate advice. The KYC document’s statement about perceived risk tolerance should be the product of the advice process, not a substitute for it.

Independently, the advisor has a duty to objectively analyse your risk capacity – that is, given your assets, liabilities, income, needs and wants, what is your ability to lose money and meet your funded goals?

Does KYC Stop When the Account Is Opened?

People change. Their financial advice may need to change with them. Retirement is an obvious example. But less obvious events may be just as important:

• separation or divorce;
• a serious illness;
• loss of employment;
• supporting an adult child;
• an inheritance;
• unexpected expenses;
• increased debt;
• changes in income; or
• a new need to withdraw money from investments.

If the advisor does not learn that the client’s circumstances have changed, the advice may continue to be based on information that is no longer accurate. The advisor has a duty to keep up to date. That involves regular, meaningful engagement about material circumstances to anticipate or detect material changes, rather than simply relying on periodic email confirmation.

What Questions Can You Ask About KYC?

If you are wondering whether your advisor actually understands you, consider:

1. Did the advisor ask questions beyond what was required to complete the forms?
2. Did the advisor explore inconsistencies in your answers?
3. Could the advisor explain why the investments recommended were appropriate for your particular circumstances?
4. Has the advisor asked how your circumstances have changed?
5. Do the KYC documents actually match what you remember telling the advisor?

That last question can become particularly important after an investment loss.

What If the Paperwork Does Not Match Your Circumstances?

A dispute sometimes reveals a fundamental disagreement about who the investor supposedly was. The advisor’s file may describe someone as an aggressive or sophisticated investor. The investor remembers saying something very different: I cannot afford to lose this money. That does not by itself establish that anybody did something wrong. Documents and communications have to be reviewed in context. But it is an important question: Did the investment strategy fit the real client, or merely the client described on a form?

If you have suffered a significant investment loss and believe your KYC information did not accurately reflect your circumstances, objectives or willingness and ability to accept risk, that issue may warrant closer examination.

For information about our services, see unsuitable investment advice.

Frequently Asked Questions