Mutual Funds And Scholarship Plans
Suitability with or without recommendation
The mutual funds representative must gauge the suitability of transactions involving an investment product before opening an account for a client and before recommending a product. They must also evaluate the suitability of the orders made by the client before executing the transaction. This suitability must be established based on several factors:
- The client’s personal situation
- Their usual financial situation
- Their investment knowledge
- Their investment objectives
- Their investment time horizon
- Their risk tolerance
- The proposed product
- The effects of the measure on the client’s account, including fund concentration and liquidity
- The real and potential impact of the costs on the performance of the client’s investments
- The client’s best interest
The advisor must take reasonable steps in a timely manner to evaluate the suitability of the investments in line with any events that occur after the initial assessment. The goal is to modify investments that would no longer suit the client’s needs. Of course, the scope of this obligation depends on the changes that have led to the review (changes in the client’s situation or in the product itself for instance), changes in the services and funds offered, or changes in the composition of the account. The advisor must review the client’s information at least once every 36 months, ideally every year.
When a mutual funds representative determines that an investment is no longer suitable for a client account, for example because the structure or its degree of risk has changed, they must take the appropriate measures. They will communicate quickly with their client to advise them and determine whether their situation has experienced changes that would justify changing the information they keep on them, or if not, recommend adjustments to the portfolio.
The mutual funds representative may receive a request for a specific transaction from a client, which is also called an unsolicited order. If this request does not suit the client’s situation and investor profile, the advisor must first find out the client’s motivation. Their situation may have changed, and their profile may need to be updated as a result. However, it’s also possible that the client has been influenced by a third party, such as a person that doesn’t have the same profile as them, or by the media. This advisor must therefore take the time to discuss with their client to understand their needs and true profile and, if applicable, review their profile or their investments.
The advisor cannot change the information on a client to justify the suitability of an investment, an order, or a recommendation that otherwise does not suit this client.
Even in the case of an unsolicited order, the advisor has the obligation to collect information to know their client and to warn them when a transaction is not suitable—that is, when it doesn’t fit their situation. The advisor must notify the client of the reason that it is not suitable and then recommend another option that is more in line with their profile.
If the client still wants to go ahead with their request, this warning must be added in writing to the client’s file. A confirmation the client wants to take action despite it not being suitable to their needs must also be added and should include the client’s signature.
The mutual funds representative may refuse to execute a buy order that doesn’t fit the client’s profile, because ultimately, they are the one that must demonstrate they acted professionally and in the client’s best interest. However, they cannot refuse a redemption order. The fact that they have the client’s best interest in mind doesn’t affect it.
If the mutual funds representative determines that a transaction requested by his client doesn’t suit him and he agrees to execute it anyway, he must know that just writing “unsolicited” on the transaction form isn’t enough, because in the event of a client complaint, he will be responsible for demonstrating that the appropriate warnings were given. It is wise, therefore, to document the warning meticulously.
Before proceeding with the requested transaction, the mutual funds representative must communicate with his compliance department to understand the policy of the brokerage or firm for which he works, or to obtain advice on unsolicited orders that are not suitable.