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Know Your Client – A Short Guide for Retail Investors

Written by Caseworkers Disha Mittal & Calvin Horsten

February 16, 2023

What is the Know Your Client requirement?

Your investment advisor has a legal obligation to collect and record information about you as a client before providing financial advice. This information is used for a number of purposes, including to prevent fraud, protect the firm from liability, and ensure your money is being managed in a way that is suitable for your financial circumstances and goals.

Your investment advisor is required to collect the following information about you, at a minimum:

  • Identification: They must establish your identity and take steps to confirm the accuracy of your identity. This serves to reduce the risk of fraud.
  • Whether you are an insider of a reporting issuer or politically exposed person: They must take steps to establish whether you are an insider of a reporting issuer or a politically exposed person in order to prevent insider trading, which is a crime.
  • Personal circumstances: They must collect information on your personal circumstances in order to ensure that they can contact you if needed and ensure that their recommended investment products suit your needs. Personal information includes date of birth, address and contact information, civil status or family situation, number of dependents, employment status and occupation, whether someone other than the client is authorized to provide instructions on the account, and whether someone other than the client has a financial interest in the account.
  • Financial circumstances: They must collect information about your financial situation including annual income, liquidity needs, financial assets, net worth, and whether you are using leverage or borrowing to finance your investment. Each of these are discussed in turn:
    • Annual income: The amount of money (income) you earn in one year. This includes yearly salary, bonuses, commissions, overtime, and tips. This information provides your financial advisor with an accurate picture of the resources available to you.
    • Liquidity needs: This refers to your need for cash to meet your short-term expenses, financial obligations, or major planned expenditures. Your advisor needs to know whether you need to access the funds that you will be investing in order to understand how much can be invested, how much will need to be withdrawn, and over what time period withdrawals will occur.
    • Financial assets and net worth: They must take reasonable steps to determine your net worth, which is equivalent to the dollar value you have left over if you were to sell everything you own and use the money to pay off your debts. This information will support the suitability determination of certain financial products for your needs.
    • Leverage or borrowing to finance investments: It is important for the advisor to know whether you are using leverage or borrowing to finance the purchase of securities, or whether you are borrowing against the value of your investments, because the advisor must understand whether you are able to meet your debt obligations and make recommendations accordingly. Borrowing to invest is inherently risky because if your investment performs poorly and growth does not exceed the rate of interest accruing on the loan, you may have to repay the loan out of your own pocket – something you may not have the financial capacity to do.
  • Investment needs and objectives: Your investment objectives are your goals or what you want to achieve through your investments, such as capital preservation, income generation, and capital growth. In simpler terms, these objectives may refer to saving for retirement, education for a child, or the purchase of property. This information allows your advisor to recommend products that align with your financial goals.
  • Investment knowledge: Your investment knowledge refers to your understanding of financial markets, the relative risk and limitations of different types of investments, and the impact of different risk levels on potential returns. This information also plays a role in your advisor’s assessment of your risk profile. Take this online quiz to test your investment knowledge.
  • Risk profile: Your risk profile refers to your tolerance towards risk and your understanding of the tradeoff between risk and return. Are you comfortable with taking on significant risk, which can result in either significant returns or significant losses? Or would you prefer a low-risk, stable investment with less upside return? There are also options for moderate risk investments. In order for your advisor to make recommendations that you are comfortable with, it is crucial for you to honestly consider your risk tolerance and accurately convey this to the advisor you are working with. It is important to note that your age and life stage may also be factored in when determining your capacity to withstand loss.
  • Investment time horizon: Your investment time horizon refers to the period during which you intend to hold money in your account, or in other words, the future date when you will need to withdraw a substantial portion of the money you have invested. Your advisor is responsible for considering your time horizon in conjunction with your other circumstances, above, in developing your financial plan. A longer time horizon may permit more flexibility, whereas a shorter horizon may necessitate more conservative investments.
  • Trusted Contact: The advisor must take reasonable steps to obtain the name and contact information of a trusted contact person whom they can reach out to in order to confirm or make inquiries about 1) whether you are being financially exploited, 2) your mental capacity as it relates to your ability to make financial decisions, 3) the name and contact information of your legal representative, and 4) your contact information. The inclusion of a trusted contact person on your Know Your Client form does not mean someone else will have control over your money, or that you are losing control. It is a safeguard to protect your money if the advisor suspects you may be experiencing financial exploitation or diminished mental capacity.

This information will be collected at a meeting with your advisor and recorded on a form, which you will be asked to review and sign. Here are some things to keep in mind when reviewing:

  • Double-check how your income, risk tolerance, and time horizon have been recorded
  • If something stands out to you as inappropriate for how you would describe your financial situation, discuss it with your advisor
  • Take an active role in informing your advisor if there are changes in your circumstances, such as change of goals, change of job, receipt of new money, or unexpected expenses
  • If you have any uncertainty about the information recorded on the form, or whether it remains suitable after a change in circumstances, you may request a meeting with your advisor to review your KYC information

Important to know:

  1. The more information you provide, the more likely you are to be recommended products that are best suited to your unique financial needs and preferences.
  2. Your advisor is only permitted to make recommendations for you based on the information they have in your Know Your Client profile.
  3. If your advisor makes an inappropriate recommendation, a complete and thorough Know Your Client profile provides you, the investor, with a strong foundation to make a case against your advisor and demonstrate that their recommendations did not meet your needs or align with your risk tolerance and financial position.

It is critical that you regularly update your information to help your advisor make recommendations for you based on your most updated and current information. Make sure to inform your advisor of any changes in your financial situation. You should meet with your advisor at least once a year to review your information and your investments.

Disclaimer: This information does not, and is not intended to, constitute legal advice. This document is for general informational purposes only and may not constitute the most up-to-date information. The links to other third-party websites are only for the convenience of the reader and we do not endorse the contents of the third-party sites.