Compliance Memo

CM_2021-01; Guidance on Assessing Plan KYC Information

For more information, contact:

Compliance Team
compliance@gpwealth.ca

Date Issued:

March 29, 2021

With the upcoming Client Focused Reforms, we have an obligation to enhance the KYC assessment process with supportable and reliable documentation when determining suitability for a client. What this means is that the completion of Know Your Client (KYC) information must include sufficient advisor notes, such as the completion of an Investor Profile Questionnaire (IPQ) to support the client’s risk profile.

Using the IPQ can be the most reliable way to document the “Know-Your-Client” information. When determining a client's risk tolerance it is important that you take into account both risk capacity and risk attitude. The IPQ captures this information, which is why it is a reliable tool in supporting a client’s risk tolerance.

As you know, the scores for each section of the Questionnaire are meant to help inform the completion of the KYC – specifically, Time Horizon, Investment Knowledge, Investment Objective, and Risk Tolerance. Based on the client’s scores in each of these categories, the IPQ also provides general plan KYC guidelines and a suggested asset allocation. 

The structure of the IPQ consists of 15 targeted questions that cover the full range of KYC:

Investment Knowledge Question 1
Investment Objectives Question 2
Investment Time Horizon Question 3
Risk Capacity Questions 4-9
Risk AttitudeQuestions 10-15

Generally, with the time horizon, investment knowledge and investment objectives recorded on the IPQ, you can draw a straight line to the corresponding sections on the KYC form.

However, with respect to the questions around Risk Tolerance, we have come to recognize that more guidance is needed in interpreting the results of the IPQ. The questions are broken out into two categories: Risk Capacity (6 questions) and Risk Attitude (6 questions). Consideration must be given to several items collectively to determine the appropriate KYC Risk Tolerance for a client’s plan. 

Assessing a client’s Risk Capacity (questions 4-9)

Your client’s age combined with their financial situation, including assets and debt, amount of income and the stability of that income, are important when determining how much risk can be taken on with investments. The questions in this section deal with these aspects in relation to your client’s capacity for risk.

Interpreting the results

The scores with respect to Risk Capacity and the resulting allocation on the KYC Plan Risk Tolerance and asset mix recommendation will rely on interpretation and judgement. While scoring 30+ indicates that the client has some capacity for risk and some exposure to aggressive growth maybe appropriate, it is the starting point in determining the appropriate amount and should not be interpreted as the client accepting 100% high risk.

It should not be inferred that a score of 30+ means the client is an aggressive investor and wants substantial exposure to MH or H Risk, but rather that it may be appropriate to recommend that a portion of the KYC Plan Risk Tolerance allocation be in MH or H risk.

The following table provides basic guidelines with respect to the relationship between the Risk Capacity Score and the percent allocation to MH or H Risk that may be appropriate for a plan KYC.

Risk Capacity Score Guidelines for Risk Tolerance Allocation
30-34Up to 10% in MH or H
34-39Up to 15% in MH or H
40-44Up to 20% in MH or H
45-49Up to 30% in MH or H
50-54Up to 40% in MH or H
55-59Up to 50% in MH or H
60+50% + in MH or H

If the Risk Capacity Score is in the 60+ range, which would potentially allow for 50% or higher Risk Tolerance allocation on the KYC, it is important to go back and reflect on the responses to each of the questions in the Risk Capacity and Risk Attitude sections before making the final assessment.  A 50% or higher Risk Allocation in MH or H Risk investments is a significant amount of risk for a client to undertake. The utmost care must be taken when arriving at the percent amount that is suitable for the client.  

The maximum score for this section is 68.

Assessing a client’s Risk Attitude (questions 10-15)

Here your clients are asked a series of questions around hypothetical gain/loss scenarios. The questions are meant to gauge the client’s comfort and attitude towards risk.  

Interpreting the results  

You may find that there is a disconnect between the client’s capacity and attitude towards risk. For example, your client may express an appetite for risk, scoring high on Risk Attitude, but their score for capacity is low. Conversely, they may have a high capacity for risk but score lower for risk attitude. The risk profile for a client should reflect the lower of (a) the client’s willingness to accept risk (attitude) and (b) the client’s ability to endure potential financial loss (capacity).

The maximum score for this section is 60.

Resolving conflicts between a client's expectations and risk profile

A client's expectations for investment returns may conflict with the level of risk that they are willing and able to accept on their plan. Unrealistic expectations may lead such clients to request higher-risk products that are not suitable for them.  A detailed discussion between risk and return may be necessary to reconcile such conflicts and establish more realistic expectations.

You should not override the risk a client is willing to take on the basis that the client's expectations for investment returns cannot otherwise be met given the risk profile associated with their responses to the IPQ.  If a client's goals or investment return objectives cannot be achieved without taking greater risk than they are able or willing to accept, alternatives should be clearly explained such as saving more, spending less or retiring later.  You should explain to the client that their need or expectation for a higher return cannot realistically be met, and as a result, the higher risk profile is unsuitable.  The discussions with the client and end results must be properly documented through advisor notes and the IPQ.

Important Notes:  

  • Guidance was initially provided in the most recent Advisor Report and it has been updated with the Table above. Please use the above Table when assessing Investor Risk Tolerance vis-à-vis the IPQ. 
  • Given these guidelines, you should take the opportunity to identify your clients with exposure to MH and H Risk KYC allocations. We recommend that an IPQ be completed for an existing plan KYC with MH and H Risk Tolerance allocations. If the results of the IPQ are not consistent with a Plan Risk Tolerance, the KYC must be updated to be more aligned with the IPQ.
  • We are also in the process of updating the Portfolio Suitability Guidelines and the Client Information Document to align with the above guidelines.

As always, if you have questions or comments, contact the Compliance Department by email at compliance@gpwealth.ca.