Know-Your-Client (KYC) & suitability

The account types you have to compare

Account	How it works	Who it tends to suit
Advisory, commission based	You recommend, the client approves each trade, a charge applies per trade	A client who trades rarely and wants advice on individual decisions
Advisory, fee based	You recommend, the client approves, the fee is a percentage of assets rather than a charge per trade	A client who trades more often, or holds a mix that would generate many small commissions
Managed	The firm makes the decisions inside a mandate, disclosed and agreed in writing	A client who wants the work done and has accepted the strategy
Discretionary	A managed account in the specific sense that the representative may act without seeking approval for each trade	Only where the client has authorized it, and the authority is documented
Cash	The client pays in full for what they buy	The default for a client with limited liquid assets or low tolerance
Margin	The client may borrow from the dealer, using the account as collateral	A client who understands leverage and can carry the cost and the call

Two exam traps live in that table.

An advisory account requires approval before each transaction. A managed account does not. A candidate who answers "managed" for a client who insists on approving every trade has the wrong account, no matter how well the risk profile fits.

A fee based account is not cheaper or dearer than a commission account in the abstract. It is cheaper or dearer for this client at this trading frequency. Chapter 5 takes the products these accounts hold and compares them on cost, structure and liquidity. The syllabus wants you to match the cost structure to the behaviour, because that is what the client actually pays.

Previous Next: What the account-opening file needs