Chapter 3 - Getting to know the client

Question 1

Who must clients comply with when opening accounts? What does the act require?

Answer 1

with federal legislation, particularly the 2002 Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

This Act requires that firms and their advisors verify the identity of every client. Must be provided valid picture ID and report any large cash transactions or otherwise suspicious transactions to FINTRAC.

Question 2

What is KYC?

Answer 2

The requirements IIROC regulations set out the minimum amount of information that firms and their advisors must collect from their clients.

The KYC rule is one of the cornerstones of the investment industry.

Question 3

What does the KYC allow for investment advisors to determine?

Answer 3

The information gathered allowed investment firms and their advisors to determine the suitability of each proposed client trade, whether it was initiated by the advisor or the client

Question 4

As an advisor working for an IIROC dealer member, you must comply with the three IIROC rule sections?

Answer 4

• IIROC Rule section 3202 KYC states
• IIROC rule section 3102 business conduct states
• IIROC rule section 3402 retail client suitability determination requirements states

Question 5

What does the IIROC Rule section 3202 KYC state?

Answer 5

– A Dealer Member must take reasonable steps to learn and remain informed of the essential facts relative to every order, account, and client that it accepts.

Question 6

What does the IROC rule section 3102 business conduct state?

Answer 6

– A Dealer Member must take reasonable steps to ensure that all orders or recommendations for any account are within the bounds of good business practice

Question 7

What does the IIROC rule section 3402 retail client suitability determination requirements state?

Answer 7

– Before a Dealer Member purchases, sells, withdraws, exchanges, or transfers-out securities for a retail client’s account, takes any other investment action for a client, makes a recommendation, or exercises discretion to take any such action, the Dealer Member must determine, on a reasonable basis, that the action is suitable for the retail client.

Question 8

What variables do advisors need to consider to determine if an investment is suitable for a particular client?

Answer 8

Personal circumstances, such as marital status, age, occupation, and number of dependents
* Financial circumstances, such as income and net worth
* Risk profile
* Investment needs and objectives
* Investment knowledge
* Investment time horizon

Question 9

What are the major material changes that require a full account update?

Answer 9

A change of account name (e.g., from “Marie Roy” to “Marie and Robert Roy”)
* A change of address that takes the client out of your jurisdiction
* New marital or employment status
* Another person taking a financial interest in or gaining control over the account
* New trading authorization
* A major change in financial circumstances
A change in investment objectives or risk factors
* Any amendment to items in the regulatory section (such as insider status)
* Any major change in circumstances that affects the client’s investment objectives, creditworthiness, or risk profile

Question 10

What accounts require extra/account specific information when being opened?

Answer 10

• Joint account
• Margin account
• Discretionary account
• Managed account
• Trust account
• Registered account
• Investment club account
• Options or futures account

Question 11

Solely getting the required account information is not enough to know the client. Why must an advisor get more information from a client? What are the four categories this information falls under?

Answer 11

You need enough information to create a complete picture of the client’s current situation, short- and long-term goals, and attitude toward investing.

• That information falls under four categories:
• Client goals
• Financial information
• Client objectives, including risk and return
• Investment constraints

Question 12

(1) LG. Definition of client goals. what life issues generally guide clients goals?

Answer 12

• A defining principle of wealth management is the need to discern a client’s life goals and aspirations. With this knowledge, you can begin to build a wealth plan to help them achieve those goals. Which is what they want out of life.
• Clients generally have goals for the following life issues:
• Family and lifestyle
• Protecting lifestyle
• Planning for the future
• Managing life savings
• Building a legacy

Question 13

What are the common events that can trigger a change in a client’s life goals?

Answer 13

the birth of a child, marriage, divorce, and the death of a spouse. Furthermore, a client’s employment situation and income may change because of a promotion, a career switch, or a job loss. Finally, a client’s goals may change as they become more familiar with financial markets or simply because they are drawing closer to retirement.

Question 14

(2) Financial information. the definition + the importance.

Answer 14

• You should understand their current financial situation beyond the details provided in the account application. For a comprehensive wealth plan, you need accurate and detailed information about the client’s assets, liabilities, income, and expenses. You should then organize these details into net worth and cash flow statements. This information gives you a clear picture of the client’s situation and provides valuable insight into whether their goals are achievable

Question 15

(3) Client objectives. What does this mean? How do they relate to goals?

Answer 15

Objectives refer to the investment return the client requires and the risk he must tolerate to achieve his goals. Any actions that help the client achieve his desired return are also considered objectives. Goals and objectives are interdependent.

In other words, clients must set return objectives that are compatible with their risk objectives.

Question 16

(4) setting a return objective. Definition. Types (3).

Answer 16

• The return objective is a measure of how much the client’s portfolio is expected to earn each year on average. This measure depends primarily on the return required to meet the client’s goals, but it must also be consistent with the client’s risk profile.

An inflation-adjusted basis (i.e., before taxes, but adjusted for expected inflation)
* An after-tax basis (i.e., before inflation, but adjusted for expected taxes)
* An after-tax, inflation-adjusted basis (i.e., adjusted for expected inflation and taxes)

Question 17

What is a required return? What elements does this include? What must the required return include?

Answer 17

• A client’s required return is an estimate of the average annual return needed to meet his or her goals. It should take into consideration the client’s current and expected financial situation,

which means it should include the following elements:
* Current amount of investable assets
* Timing and size of any expected additions to the portfolio (i.e., savings or any other expected new assets)
* Current and expected future spending levels

• the required return must be sensitive to the effects of expected inflation and taxes.

Question 18

What is a risk objective defined as?

Answer 18

A client’s risk objective is a specific statement declaring how much risk the client can sustain to meet his or her return objective. The risk objective is based on the client’s risk profile. Involves both a client’s willingness to accept risk and the ability to endure potential financial loss.

Question 19

What makes up a risk profile?

Answer 19

The risk profile for a client should reflect the lower of two figures: their willingness to accept risk and their ability to endure potential financial loss.

Question 20

Ways to determine a clients willingness to accept risk? (5)

Answer 20

1. Risk defined in terms of losses –> losing money
2. risk defined in qualitative terms –> Risk of not meeting a certain goal
3. Risk defined in terms of uncertainty –> Missing out due to lack of experience/knowledge
4. Risk defined in terms of regret –> dwell on past mistakes = missing out on future G
5. Risk defined in terms of exclusion –> FOMO on gains

Question 21

How to determine a client’s ability to endure potential financial losses?

Answer 21

the ability to endure potential financial loss (i.e., risk capacity) is a more objective measure. To some extent, a client’s ability to endure potential financial loss depends on the same factors that determine the required rate of return.
requires an understanding of other factors, such as the client’s financial circumstances, including liquidity needs, debts, income, and assets.

Question 22

• Even clients who are willing and able to accept risk face several constraints that must be factored into their wealth plan. What are these three common investment constraints?

Answer 22

the client’s time horizon, liquidity requirements, and tax situation.

Question 23

(1) What is a time horizon? How can it affect them? What are the three time horizons defined as?

Answer 23

• A time horizon is the length of time expected to elapse before a client can meet a significant goal. When that period is over, the client will either withdraw some of the portfolio’s assets or enter a new stage of planning that requires an update to the wealth plan.
• Time horizons can generally be classified as short-term, medium-term, or long-term:
• A short-term time horizon is less than three years.
• A medium-term time horizon is more than three years and less than 10.
• A long-term time horizon is 10 or more years.

Question 24

(2) What are liquidity requirements? What are the three reasons a client might require liquidity?

Answer 24

• Liquidity requirements represent a client’s actual and potential cash needs. They may dictate a need for some investments that can be converted to cash quickly, at little cost. Cost includes not only commissions and transaction fees but also implicit costs.
• Clients usually require liquidity in their portfolios for any or all of three reasons: ongoing income needs, emergencies, or significant purchases they anticipate having to make in the future

Question 25

(3) What must you know about a clients tax situation? What factors should be considered when reviewing client’s taxes?

Answer 25

• To create a comprehensive wealth plan, you must have a complete understanding of the client’s tax situation. Among other things, you must know the client’s marginal tax rate, contribution limit to registered accounts, and any investment income being earned in accounts not under your management.
• When reviewing your client’s tax situation, consider the following factors:
• Taxes on investment earnings reduce the amount of money available to meet the client’s goals.
• For clients who need regular income from their portfolios, taxes reduce the amount of money available to pay current expenses.
• For clients with investments in non-registered accounts, taxes reduce the amount of money that can be reinvested to meet longer-term goals.

Question 26

What are some tax management techniques an advisor can use for their clients? (7)

Answer 26

1. Make optimal use of tax-deferred and tax-free accounts
2. Optimize the location of assets
3. Make optimal use of capital losses
4. Keep turnover low in non-registered accounts
5. . Use life insurance proceeds to pay estate taxes and probate fees
6. Make use of income slitting, keeping attribution rules in mind
7. Make use of tax shelters where permissible and advisable.

Question 27

What as a very common concern for client’s? What are the 6 variables used to help determine whether your client will achieve their goals?

Answer 27

” Will I have enough money?”
- - This concern is expressed by clients who are saving for retirement and by those who are already drawing retirement income from their investments. In most cases, it is not an easy question to answer because of the many variables involved.

• For example, suppose you and your client are exploring the savings and investing options available to achieve financial independence in retirement. Six variables are involved in this exercise:
• The number of years to retirement (and therefore the time available to accumulate wealth) and the likely number of years in retirement
• The annual income required during retirement (based on the lifestyle the client expects after leaving the workforce)
• The amount of retirement savings already in place
• The amount of money the client can save each year
• The inflation rate between now and the date of retirement and the likely inflation rate during retirement
• The expected return on the client’s savings over the years

Question 28

Of the 6 variables used to help determine whether your client will achieve their goals, which four variables can the client control?

Answer 28

They can pick the age of retirement, which may be earlier or later than the traditional age of 65.
* They can increase or decrease the annual income required in retirement by altering their lifestyle expectations.
* They can adjust the amount of income they can save each year before retirement with changes in their lifestyle today.
* They can control, to some extent, the returns they can expect by adjusting the asset allocation of their portfolio and, therefore, the level of risk.

Question 29

What is the client discovery process? What does it do?

Answer 29

• The method used to collect and document all the information you need to create a comprehensive wealth plan

This process is used to find out what the client wants to accomplish through a wealth plan. The answer requires a probing dialogue during which you must ask personal, emotionally charged questions that may be difficult for the client to answer.

Question 30

The wealth management approach to client discovery has three distinct phases, what are they?

Answer 30

1. Setting the stage and building rapport
2. Conducting emotional discovery
3. Bridging to financial discovery

Question 31

PHASE 1: Setting the stage and building rapport

Answer 31

• At the outset, you should explain the wealth management approach, so the client understands that you provide more than simple investment management
• Building rapport is necessary because, as the advisor, you need your clients to feel comfortable. Rapport-building is used in this process to uncover potential areas of concern that you should explore later in the conversation. Rapport-building involves talking about family, work, interests, passions, dreams, plans, and goals.

Question 32

PHASE 2: Conducting emotional discovery

Answer 32

• Emotional discovery is the art of replacing talk of financial solutions with a discussion of life issues. Most major life issues have a financial consequence that can be addressed through financial planning and investment management.
• Family and lifestyle, protecting lifestyle, planning for the future, managing savings, and building a legacy

Question 33

PHASE 3: bridging to financial discovery

Answer 33

• Each life issue discovered in the wealth management process carries with it multiple possible solutions. You should bring these solutions into the discussion only after fully exploring the extent of the client’s needs and concerns.

Question 34

Four general planning issues flow from emotional discovery

Answer 34

accumulation, protection, conversion, and transfer of financial wealth.

Question 35

What Q’s should you ask when discussing, 1. Accumulating financial wealth

Answer 35

• When discussing this issue, the focus should be on the client’s need to grow assets.
• “how much can you put aside?” – “How much money will you need?” – etc.

Question 36

What Q’s should you ask when discussing, 2. Protecting financial wealth

Answer 36

• Protection of wealth (i.e., risk management) is an emotional need, as well as a planning issue.
• “How do you feel about risk?” – “What level of risk are you comfortable with?” - -etc.

Question 37

What Q’s should you ask when discussing, 3. Converting financial wealth to income

Answer 37

• Creating an income stream is particularly important in retirement, but it can also be necessary in the case of disability, unemployment, or family emergencies.
• “how much income do you consider to be enough?”
• “Where will the income come from?”

Question 38

What Q’s should you ask when discussing, 4. Transferring financial wealth

Answer 38

• Wealth transfer relates to an estate plan, as well as to building a living legacy.
• “what are your plans for the future?” – “Do you foresee having to help children, parents, etc.?”