Standard III(C) Suitability

what is Standard III(C) Suitability

1. When Members and Candidates are in an advisory relationship with a client, they must:

   1. Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.

   2. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.

   3. Judge the suitability of investments in the context of the client’s total portfolio.

2. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.

1. Know Your Client

Before making recommendations or taking action:

• Assess:

  • Investment experience

  • Risk tolerance

  • Return objectives

  • Financial situation

  • Investment constraints

• Update this information regularly.

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2. Determine Suitability

An investment must be:

• Suitable for the client's financial situation.

• Consistent with the client's:

  • Objectives

  • Risk tolerance

  • Constraints

  • Written investment policy statement (IPS)

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3. Consider the Total Portfolio

• Do not evaluate investments in isolation.

• Consider:

  • Existing holdings

  • Diversification benefits

  • Overall portfolio risk

Key Point:
A risky investment may still be suitable if it improves the portfolio's overall risk-return profile.

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4. Follow Mandates and Strategies

Portfolio managers must invest consistently with:

• Fund mandate

• Investment style

• Strategy

• Prospectus objectives

What are the main requirements?

1. Know Your Client

Before making recommendations or taking action:

• Assess Investment experience, Risk tolerance, Return objectives, Financial situation. Investment constraints

• Update this information regularly.

2. Determine Suitability

An investment must be:

• Suitable for the client's financial situation.

• Consistent with the client's: Objectives, Risk tolerance, Constraints. Written investment policy statement (IPS)

3. Consider the Total Portfolio

• Do not evaluate investments in isolation.

• Consider: Existing holdings, Diversification benefits, Overall portfolio risk

4. Follow Mandates and Strategies

Portfolio managers must invest consistently with: Fund mandate, Investment style, Strategy, Prospectus objectives

what is an Investment Policy Statement (IPS) and what should it include?

Document client objectives and constraints.

Serve as the foundation for investment decisions/ suitability analysis

• Risk tolerance

• Return objectives

• Time horizon

• Liquidity needs

• Tax considerations

• Legal/regulatory constraints

• Unique circumstances

• Roles and responsibilities

• Review schedule

guidance around Updating Client Information

• At least annually

• Whenever significant client circumstances change

• Before major investment decisions

Examples of individual circumstance changes

• Marriage/divorce

• Dependents

• Health changes

• Tax changes

• Wealth changes

• Liquidity needs

• Retirement

examples of insitutional client circumstance changes

• Pension liabilities

• Distribution requirements

• Withdrawal policies

What to do when Client Requests an Unsuitable Trade

Step 1: Discuss Concerns

• Explain why the trade conflicts with the IPS.

• Educate the client on risks.

Step 2: Determine Impact

If Impact is Minor

• Obtain client acknowledgment.

• Follow firm procedures.

• Trade may be executed if permitted.

If Impact is Material

• Revisit and update the IPS. → risk tolerance section

• Ensure client understands consequences.

If Client Refuses to Update IPS

• Execute in a separate unmanaged account (if allowed).

• Reassess whether the advisory relationship should continue.

what is managing to a mandate?

• Portfolio Managers of Funds must follow the fund's mandate.

• Do NOT determine whether the fund is suitable for each investor.

• Advisors to Individual Clients must determine suitability for each client.

recommendations for members

1. For each client, put the needs, circumstances, and investment objectives into a written IPS.

2. Consider the type of client and whether there are separate beneficiaries, investor objectives (return and risk), investor constraints (liquidity needs, expected cash flows, time, tax, and regulatory and legal circumstances), and performance measurement benchmarks.

3. Review the investor's objectives and constraints periodically to reflect any changes in client circumstances.