Unit 3 Flashcards
Can you tell risk tolerance based on a client’s level of adventurousness in their personal life?
Risk tolerance is very difficult to determine. You can’t make assumptions about financial risk tolerance based on activities risk level. You should always interview the client about finances to determine suitability.
What’s the relation between risk and returns?
Usually the market rewards risk takers with higher returns
If a bank approves someone for a loan, does that mean that leverage is a suitable investment strategy?
You must consider the suitability regardless of what the bank has decided. The bank may have decided based on different goals and criteria.
What does leveraging mean for investments?
Using borrowed funds to invest can help magnify returns but it will also magnify any losses, especially if the value of the investment drops below the amount of the loan.
Is leveraging permitted by the MFDA?
Only if it’s suitable for the client, but you must thoroughly assess the client. Past of the assessment is ensuring your client can meet the loan obligations even if the investment value drops.
Is there an exemption to making a recommendation without the info from KYC?
Not that I know of. You need to find out about your client before making a recommendation. It’s in your client’s best interest.
How important is the clients educational background when assessing his financial needs (KYC)?
Not usually relevant. What’s relevant: investment experience, risk profile. Though more info is always better than not enough.
Does the risk profile of the investment matter more for KYC or KYP duties?
KYC is about matching the risk of the product to the risk tolerance of the client.
KYP is about knowing the risk level of the product and its objectives , as much as possible about all the products including any new ones.
In a period of low interest rates, would you be inclined to “leverage”?
You could make an investment using borrowed funds but , beware, if an investment falls in value, someone using leverage will cover a greater loss then someone who does not.
If you borrow money to invest, you owe interest payments no matter what happens to your investment. If It drops in cake, you still owe interest., so you have suffered more than someone who did not borrow.
The value of the investment may even fall below the value of the loan.
Even where returns on leveraged investments are positive, interest costs may exceed the returns received.
Despite low interest rates or the tax deductibility of interest payments, leverage is not suitable for everyone. You must address whether it is a suitable investment using KYC and KYP criteria.
What do you do when a client requests an unsolicited trade?
You must do a suitability assessment on the product. If you view the product as unsuitable, you must tell the client and document the details. You should check with your compliance department on whether or not you can refuse the trade.
What are your 3 basic duties in determining suitability (hint: that’s one of them)
- KYC (client facts)
- KYP (product facts)
- Suitability determination (match)
What’s first: KYC or KYP?
KYC but both are equally important
How do you prove you met your dealing rep obligations?
You must diligently document the KYC KYP and suitability assessments to be able to evidence that your carried out your obligations fairly, honestly, and in good faith with clients. Document everything in writing, on paper or digitally. Document every action that you take as you perform it.
Why is documentation important?
- protects you from disciplinary or regulatory action
- protects you from allegations the client can bring against you, especially if the client loses money.
- you’re required to document the reasonable basis for your suitability determination and how you have met your obligation to put the client’s interest first.
Are some products inherently unsuitable? And how do you figure that?
No, generally, suitability is very subjective. It’s only determined against a given client’s KYC, the product’s KYP info, and determining what’s best for the client.
