IA Compliance:
Documenting Suitability
The following information reflects the views of NASAA’s Investment Adviser Section Resources and Publications Project Group. It does not necessarily represent the views of NASAA, and it is not intended as legal advice. Any questions should be directed to the appropriate state regulators.
Investment recommendations made to clients must align with the clients’ needs and objectives. Investment advisers have a fiduciary duty to provide advice that is in the best interest of the client and are prohibited from making unsuitable recommendations. This article will discuss how investment advisers can sufficiently document their clients’ suitability information to support and justify investment recommendations.
What should be included in the client file?
Each client has their own unique needs and objectives. A single questionnaire with a few basic questions about a client’s age, income, and risk tolerance may not be enough to justify the adviser’s recommendations. Advisers should gather adequate documentation to create a comprehensive picture of their client’s financial needs and objectives.
Suitability documentation for recommendations will vary depending on the firm, investment products being recommended, and frequency of client meetings. Advisers should collect this information when onboarding a client as well as periodically thereafter (e.g. during client meetings or at least annually) to ensure the information is current. Updating and retaining suitability documentation is required even if no changes have occurred. Advisers will likely need to use a combination of the following:
- Client questionnaires;
- Notes from client meetings and phone calls;
- Client agreements;
- Account applications with custodians;
- Customer Relationship Management files and notes;
- Emails or other electronic communication; or
- Financial plans (if applicable).
The above documents should capture all the following required client information:
- Basic identifying information such as name, age, marital, and employment status.
- Basical financial information such as income and expenses, net worth (including liquid vs. illiquid assets), and current investments from all sources.
- Investment objectives based on the client’s time horizon, liquidity needs, tax considerations, risk tolerance, and investment experience.
Advisers should collect supporting documentation for each investment recommendation made to clients. The information and records collected should answer the following questions:
- Why was the investment recommended? What other products were considered?
- How does the recommendation fit within the client’s overall investment strategy/portfolio?
- Does the investment pose a higher risk to the client? How is the higher risk justified?
- Have the risks associated with the investment been fully disclosed and documented?
- Is the amount of the investment appropriate based on the client’s objectives, risk, and needs?
What are Examiners looking for?
Examiners view suitability holistically. Advisers should expect examiners to request and review books and records such as trade blotters, client files, and account statements for accuracy and completeness. If an adviser recommends alternative products or investment strategies involving higher risks, they should be prepared to explain to the examiners, verbally or in writing, why such recommendations were made and how they fit in with the client’s overall strategy. Typically, the more complex or high risk the product the more documentation will be required. Maintaining robust client files including documented client discussions not only aids in demonstrating suitability requirements are met during examinations, but also protects an adviser if a suitability complaint is filed by a client.
Advisers with questions about their state’s suitability documentation requirements or best practices should contact their state securities regulator.
