CSC Working with Retail Clients 2 — Questions and Answers
Question 1: A retail client instructs their advisor to purchase a highly speculative investment that conflicts with their documented risk tolerance. What should the advisor do?
- Execute the trade immediately as directed
- Refuse the trade outright without discussion
- Document the client's instruction, inform them of the conflict, and execute only if the client insists in writing (Correct answer)
- Escalate to the branch manager before taking any action
Correct answer: Document the client's instruction, inform them of the conflict, and execute only if the client insists in writing
Advisors must document client instructions that conflict with their profile, inform the client of the mismatch, and may execute if the client insists but should note the override in writing.
Question 2: Under the 'Know Your Client' (KYC) obligations, which of the following is NOT typically required information?
- Client's investment objectives
- Client's employment history for the past 10 years (Correct answer)
- Client's risk tolerance
- Client's financial situation
Correct answer: Client's employment history for the past 10 years
KYC requires investment objectives, risk tolerance, time horizon, and financial situation, but does not require a detailed 10-year employment history.
Question 3: A client wants to open a joint account with their spouse. Which statement about joint accounts is correct?
- Only one KYC form is required for both account holders
- Both account holders must provide KYC information (Correct answer)
- The primary account holder's KYC covers both parties
- Joint accounts are not permitted for retail clients
Correct answer: Both account holders must provide KYC information
Both joint account holders must complete KYC requirements since the suitability obligation applies to each person on the account.
Question 4: What is the primary purpose of a client's Investment Policy Statement (IPS)?
- To legally bind the advisor to specific investment returns
- To document the client's investment goals, constraints, and guidelines for portfolio management (Correct answer)
- To satisfy tax reporting requirements for CRA
- To replace the need for ongoing KYC updates
Correct answer: To document the client's investment goals, constraints, and guidelines for portfolio management
An IPS formally documents the client's investment objectives, risk tolerance, time horizon, and constraints to guide portfolio management decisions.
Question 5: A senior client shows signs of cognitive decline. What is the advisor's most appropriate course of action?
- Continue managing the account as normal to avoid offending the client
- Immediately freeze the account without consulting anyone
- Escalate concerns to a supervisor and consider involving a trusted contact person (Correct answer)
- Transfer all assets to cash pending a court order
Correct answer: Escalate concerns to a supervisor and consider involving a trusted contact person
Advisors should escalate concerns about client vulnerability to supervisors and may reach out to a trusted contact person previously identified by the client.
Question 6: Which best describes the 'time horizon' component of a KYC assessment?
- The number of years the advisor expects to work with the client
- The period over which the client expects to hold investments before needing the funds (Correct answer)
- The deadline for completing KYC documentation
- The frequency with which the client wants portfolio reviews
Correct answer: The period over which the client expects to hold investments before needing the funds
Time horizon refers to how long the client intends to keep money invested before needing access, which significantly influences appropriate asset allocation.
Question 7: A client claims they have a very high risk tolerance on a questionnaire but their financial situation shows heavy debt and minimal liquid savings. How should the advisor reconcile this?
- Accept the questionnaire result as definitive
- Use the lower of the stated tolerance and what the financial situation supports (Correct answer)
- Assign maximum risk tolerance since the client self-assessed it
- Decline to open an account for the client
Correct answer: Use the lower of the stated tolerance and what the financial situation supports
Advisors must assess risk capacity (ability to absorb losses) alongside risk tolerance (willingness to take risk) and use the more conservative result.
CSC Working with Retail Clients 2
A retail client instructs their advisor to purchase a highly speculative investment that conflicts with their documented risk tolerance.
What should the advisor do?