Know-Your-Client (KYC) & suitability

Product due diligence happens at two levels, and the exam expects you to keep them apart.

At the dealer level, the firm has to assess a security before it goes on the shelf, approve it, and keep monitoring it afterwards. The requirements sit in the know your product provisions of National Instrument 31-103 and in the Investment Dealer rules. The assessment covers:

• Structure.
• Features.
• Risks.
• Costs, both the initial kind and the ongoing kind.
• The impact those costs have on what the client keeps.

At the individual level, the know your product obligation requires the representative to take reasonable steps to understand every security they transact in or recommend, including any model portfolio they use. The firm's approval does not do this work for you. It tells you the product is permitted. It does not tell you that you understand it. Chapters 2 to 5 do that work product by product: bonds, equities, the analytical tools, and managed products.

Impact of costs is the phrase to slow down on. Costs reduce the client's net return, and they change the risk and return relationship: a product that must clear a high fee before it beats a cheaper alternative is a different product than the headline return suggests. Initial costs and ongoing costs both count, and they are not the same burden over a ten year horizon.

Four things you should be able to state for any product you recommend:

• Its structure: what it legally is, and how it generates a return.
• Its features, including costs, liquidity and any embedded right such as a call.
• Its risks, in plain language a client can act on.
• The client it fits, which is the target market question and the bridge to suitability.