The Upside: Know Your Client: How your advisor gets to know you

[00:00:00.000]

Subtitles are AI-Generated.

 

[00:00:06.239]

Hello, and welcome to The Upside.

 

[00:00:08.241]

I'm your host, Kate Bako.

 

[00:00:10.110]

As investors navigate different chapters of their financial journey, it's

 

[00:00:13.580]

important not only to know your investments, but for your financial advisor to

 

[00:00:17.017]

know every part of that journey as well.

 

[00:00:19.352]

That's where Know Your Client, or KYC, comes in.

 

[00:00:22.956]

KYC is a foundational part of your relationship with the financial advisor.

 

[00:00:27.193]

It helps ensure the investments you hold align with your goals, time horizon,

 

[00:00:31.664]

comfort with risk, and overall financial situation.

 

[00:00:34.401]

Joining me today to dive deeper into this topic is Andrea Rigobon, Director

 

[00:00:38.538]

Legal Services, Retail and Regulatory.

 

[00:00:41.574]

She's here to explain why KYC plays such an important role in supporting better

 

[00:00:45.612]

advice. Andrea, welcome.

 

[00:00:47.347]

Hi, Kate. How are you?

 

[00:00:49.115]

Good. How are you? I'm doing well, thanks.

 

[00:00:51.084]

Excellent. Thank you for joining us. And I think in order to dive into the

 

[00:00:54.320]

topic, we'll start with what is it?

 

[00:00:56.489]

What is KYC? What is Know Your Client?

 

[00:00:59.059]

Fantastic question. It's exactly that.

 

[00:01:02.295]

Know your client. Know about your client, and so

 

[00:01:06.366]

I want to, in order to explain it, take a step back and say one of

 

[00:01:10.370]

the key obligations a financial advisor has is to make

 

[00:01:14.507]

sure when they're recommending an investment to a client, an investor,

 

[00:01:19.312]

that that investment is suitable.

 

[00:01:21.214]

That's a regulatory obligation, right?

 

[00:01:23.817]

And in order to fulfil that key, key regulatory obligation.

 

[00:01:28.488]

The financial advisor is going to need to have information about

 

[00:01:32.492]

their client. And that's what we call KYC, know your

 

[00:01:36.463]

client. And so, you know, what are the elements of KYC?

 

[00:01:40.066]

When we talk about what information does a financial advisor need to

 

[00:01:44.003]

know about their client in order to ultimately recommend an

 

[00:01:48.208]

investment, they need to know their financial circumstances, obviously,

 

[00:01:52.912]

so what's their income, what are their net financial assets, that type

 

[00:01:56.883]

of thing. Their personal circumstances, do they have dependence that they need

 

[00:02:00.753]

to support, and the like.

 

[00:02:02.589]

Their investment time horizon, really important, investment

 

[00:02:06.559]

needs and objectives, and their ability

 

[00:02:10.997]

to really take on risk, or their willingness to

 

[00:02:15.301]

take on risks. And that really, ultimately, is what defines

 

[00:02:19.405]

Know Your Client. And so when they are making a recommendation

 

[00:02:23.710]

and ensuring that recommendation is suitable, They really need to have

 

[00:02:27.647]

that full picture of information, the KYC

 

[00:02:31.885]

information, so that they can make sure that investment is ultimately

 

[00:02:36.256]

suitable. So in a nutshell, that is what we call KYC,

 

[00:02:40.727]

really, really important. And it is a unique regulatory obligation

 

[00:02:45.031]

in addition to suitability for financial advisors.

 

[00:02:48.468]

So you said a couple interesting things there, the first of which is that

 

[00:02:52.205]

advisors need this information to make the best decisions for you.

 

[00:02:55.508]

Makes sense. But you also mentioned a concept called suitability.

 

[00:02:59.312]

What does that mean exactly?

 

[00:03:01.047]

Yeah. So.

 

[00:03:02.949]

Again, like KYC, it is in plain language

 

[00:03:07.220]

what you say, suitability.

 

[00:03:09.856]

Suitability is making sure an investment decision is suitable.

 

[00:03:13.626]

In order to do that, the regulators have a couple steps

 

[00:03:17.697]

that an advisor needs to satisfy.

 

[00:03:19.599]

One would be, you need to know your product, right?

 

[00:03:22.302]

You need to a product to make sure it's suitable.

 

[00:03:24.971]

KYC. You need know your KYC and know your client information.

 

[00:03:28.141]

Thank you very much. In order to ensure something is suitable and then the

 

[00:03:31.344]

advisor will be thinking about things like concentration and the investor's

 

[00:03:35.315]

liquidity fees and performance all of

 

[00:03:39.285]

that will ultimately go into a suitability determination.

 

[00:03:43.523]

So while it might seem like a lot of upfront information, absolutely

 

[00:03:47.594]

necessary for your advisor to have this.

 

[00:03:49.662]

And it protects investors ultimately as well because you want to

 

[00:03:53.700]

make sure that that financial professional is really considering all

 

[00:03:57.637]

the important facts in order to recommend a suitable

 

[00:04:01.741]

investment.

 

[00:04:02.342]

Absolutely. Now, is this a new concept or has it recently

 

[00:04:06.546]

become more robust? Tell me more about that.

 

[00:04:08.948]

Great question. So this has existed for years and years and years.

 

[00:04:12.652]

Certainly not a new concept.

 

[00:04:15.054]

Regulators in more recent years have enhanced advisor obligation,

 

[00:04:19.392]

conduct obligations, and added some new components and

 

[00:04:23.463]

new clarity around what they expect advisors to do when it comes to collecting

 

[00:04:27.667]

KYC information, and some other new things around suitability.

 

[00:04:31.604]

But let's focus on on KYC.

 

[00:04:34.140]

And so regulators have really made it clear that they

 

[00:04:38.211]

expect the KYC exercise, so collecting

 

[00:04:42.181]

that information to clients, to be more than just a tick the box exercise.

 

[00:04:46.552]

They want financial advisors to engage in a meaningful discussion and

 

[00:04:51.057]

really try to understand the client, understand what

 

[00:04:55.028]

their investment needs and objectives are, understand what they're financial

 

[00:04:58.731]

picture really looks like through a meaningful conversation.

 

[00:05:02.602]

And where the client perhaps doesn't have a lot of investment knowledge to

 

[00:05:06.639]

ask more probing questions.

 

[00:05:08.641]

And so that's why investors might be you know wondering why is my advisor

 

[00:05:12.912]

asking me all of these questions.

 

[00:05:15.515]

Like this is a lot personal information that I'm disclosing but ultimately

 

[00:05:19.585]

it's so that the advisor can fulfil their responsibilities under

 

[00:05:24.257]

regulation. So really really super important.

 

[00:05:27.660]

And so, you know, I mentioned one of the enhancements is around regulators

 

[00:05:31.998]

clarifying that that KYC exercise has to be a

 

[00:05:36.035]

meaningful discussion and not just the investor filling out a form.

 

[00:05:40.573]

Another key thing that came out recently, I believe the enhances came out

 

[00:05:44.544]

around 2021, was this idea of a risk profile.

 

[00:05:50.483]

So advisors always had to calculate a client's

 

[00:05:54.587]

risk. But previously, they were only really focused

 

[00:05:58.858]

on one element of risk, risk tolerance, right?

 

[00:06:03.162]

Instead of risk capacity. So there's two sort of elements of risk.

 

[00:06:06.733]

A client's attitude towards risk, and that has always

 

[00:06:10.970]

been in the rule. So when a client says, you know, I really wanna take on more

 

[00:06:14.574]

risk, and they have a feeling like they don't wanna be in the safest

 

[00:06:18.077]

investments, and they wanna take more risk.

 

[00:06:20.413]

That's the subjective measure.

 

[00:06:22.815]

But what's new, and what I mentioned about this risk profile, is the

 

[00:06:26.753]

regulators have extended that to ability to withstand losses.

 

[00:06:31.758]

And the regulators want advisors to calculate these two things separately.

 

[00:06:36.496]

So ability to with stand loss is really an objective measure.

 

[00:06:40.366]

So that's where the advisor would look at other KYC information to

 

[00:06:45.104]

come up with a risk rating or a risk profile there.

 

[00:06:49.442]

For the client's ability to withstand loss.

 

[00:06:51.878]

So they'd be looking at, no, does the client have assets elsewhere,

 

[00:06:56.115]

right? Does the client has a longer investment time horizon

 

[00:07:00.286]

and they can take on perhaps more risk.

 

[00:07:02.155]

That's more objective.

 

[00:07:03.890]

And so within this risk profile that's new, there's the two elements, attitude

 

[00:07:08.127]

and ability to withstand loss.

 

[00:07:10.263]

The regulators have clarified that they want advisors to calculate them

 

[00:07:13.900]

separately and then the overall risk of the client will be the lower of

 

[00:07:17.870]

the two. And this is all meant to protect the investor,

 

[00:07:22.208]

to make sure that their risk profile

 

[00:07:27.013]

properly aligns with their attitude and tolerance, so

 

[00:07:31.117]

that ultimately the financial advisor can recommend something that's

 

[00:07:35.354]

suitable from a risk perspective for the investor.

 

[00:07:38.858]

Hmm, and I would imagine very important to have an advisor there to guide you

 

[00:07:42.995]

through that Because if you've never invested before or you're a bit more

 

[00:07:46.933]

novice, it's pretty easy to have a subjective concept of risk

 

[00:07:51.070]

Oh, yeah, let's load it on no problem for me But I think the separation as

 

[00:07:55.041]

you mentioned of the objectivity is really important to establish the bigger

 

[00:07:58.778]

picture Now, is this something that would be available to investors if they

 

[00:08:02.715]

were doing it themselves, for example, on an app or a self-directed

 

[00:08:06.953]

account, or are these enhancements kind of exclusive to the financial

 

[00:08:11.057]

industry working with financial advisors?

 

[00:08:13.226]

Yeah, so when we talk about KYC and suitability,

 

[00:08:17.497]

we're talking about a regulatory obligation

 

[00:08:21.701]

that somebody who is registered to give financial

 

[00:08:25.738]

advice has. It's one of their conduct obligations.

 

[00:08:28.841]

So if you are investing on a discount brokerage platform and you are

 

[00:08:32.945]

not paying for financial advice, and you're making that

 

[00:08:36.949]

investment decision yourself completely on your own, you're not getting

 

[00:08:40.486]

financial advice. There likely won't be somebody there that needs to

 

[00:08:44.690]

collect that information on you because you are making the decision yourself.

 

[00:08:49.795]

So when we look at that, it makes sense that a

 

[00:08:53.799]

financial advisor would have that type of responsibility because

 

[00:08:58.137]

they have a duty there. They're providing financial advice and in order to

 

[00:09:02.642]

apply their expertise and apply their knowledge and come up with something that

 

[00:09:06.045]

is suitable for that client, they You have to go through the rigour of knowing

 

[00:09:10.216]

the client. And knowing their circumstances so that they

 

[00:09:14.186]

can ultimately then recommend something that is appropriate for the

 

[00:09:18.157]

client. And so, I always say you get what you pay for, but you're getting a

 

[00:09:22.028]

real great service. And it's a service that is regulated,

 

[00:09:26.532]

meaning the reason you're providing all this information is because there's

 

[00:09:30.937]

somebody out there, a regulator, the Ontario Securities Commission or zero who

 

[00:09:35.074]

cares about investors just like advisors and so they put

 

[00:09:39.045]

out the rules the advisors follow those rules and

 

[00:09:43.149]

that's a great thing you know.

 

[00:09:45.952]

Paying for advice, paying for peace of mind.

 

[00:09:48.688]

Love it.

 

[00:09:50.623]

Okay, let's say I'm a novice investor, I've never participated in

 

[00:09:54.660]

the markets before, and I'm hit with this KYC, know your client risk

 

[00:09:59.065]

profile analysis.

 

[00:10:00.733]

How am I supposed to determine where I fall in that?

 

[00:10:03.936]

That sounds overwhelming, but the great-

 

[00:10:05.972]

thing is you're not hit with it, okay?

 

[00:10:10.242]

This is something that the advisor really is responsible

 

[00:10:14.580]

for and your advisor will have some they likely have

 

[00:10:18.684]

a checklist and that's okay if it you know if they use that checklist as part

 

[00:10:22.388]

of part of the meaningful discussion or questionnaire and there should

 

[00:10:26.359]

be some questions they're meant to uncover.

 

[00:10:29.395]

Right? How you feel about risk, but also whether you can

 

[00:10:33.466]

take on risk, right?

 

[00:10:35.401]

And so the advisor will come up with what the actual risk

 

[00:10:39.405]

rating is. That's not something that the investor has to worry about, but

 

[00:10:43.576]

in conversation with the investor, the advisor will learn,

 

[00:10:47.546]

right, and then come up ultimately with the risk rating.

 

[00:10:51.484]

But you know, that's why you pay for advice, right?

 

[00:10:54.887]

You are getting somebody who has an expertise.

 

[00:10:58.357]

And in answering questions and getting to

 

[00:11:02.395]

know you better, that advisor will be able to

 

[00:11:06.499]

figure out sort of where you fall on that risk spectrum and then

 

[00:11:10.569]

recommend investments that align with that.

 

[00:11:14.040]

So it's a really, really important thing and something you're not

 

[00:11:18.077]

necessarily getting if you're doing it all yourself.

 

[00:11:21.681]

Right. So the onus is not on me.

 

[00:11:23.549]

Great. Yeah. That's good.

 

[00:11:25.818]

So in the event there's a big life change, let's say I've just gotten a big

 

[00:11:29.422]

inheritance, or I'm saving up to purchase a home, or interest

 

[00:11:33.392]

rates are going up and now my mortgage payment is going up, are these the type

 

[00:11:36.796]

of things that I should inform my advisor of?

 

[00:11:39.532]

Is the KYC static? How often is it reviewed?

 

[00:11:42.835]

Yeah so there are requirements around when the advisor

 

[00:11:46.839]

needs to review the KYC information and so

 

[00:11:51.077]

a typical non-managed account would

 

[00:11:55.114]

be and that's where you the advisor still has to reach out to the investor

 

[00:11:59.385]

to approve recommendations but in that circumstance

 

[00:12:03.522]

every 36 months the KYC has to be

 

[00:12:07.560]

updated, but more frequently, if there is a significant change,

 

[00:12:11.931]

right? And then that goes to your question, well, if I'm the investor and

 

[00:12:15.401]

something changes, I think at the outside of the relationship, good practise

 

[00:12:18.938]

would be for your advisor to tell you if something changes please reach

 

[00:12:23.008]

out to me because they wanna go through that exercise to

 

[00:12:27.213]

look back at your KYC information, look back your risk profile and

 

[00:12:31.250]

look at your investments and see if they continue to be suitable for you.

 

[00:12:35.654]

So really really really important and you should reach out to your

 

[00:12:39.792]

financial advisor because that may change things but the financial

 

[00:12:43.763]

advisor themselves has a responsibility to keep in touch with you you know

 

[00:12:47.800]

so don't get annoyed if they're reaching out because they need to know if

 

[00:12:51.036]

things are changing in your life so that they can continue to fulfil their

 

[00:12:54.740]

obligation to make sure that KYC information is up to

 

[00:12:58.778]

date and that your investments are suitable.

 

[00:13:01.280]

That's great. So it's a two way process.

 

[00:13:03.048]

I inform when necessary, but they're also required to check in on me, which is

 

[00:13:07.153]

so nice. And again, that's that peace of mind that comes with working with a

 

[00:13:10.456]

financial advisor. For sure.

 

[00:13:12.792]

Andrea, thank you so much for joining us today and for sharing your expertise

 

[00:13:15.795]

on all things KYC.

 

[00:13:17.463]

Always a pleasure.

 

[00:13:19.231]

Thank you for watching The Upside. For more investor content, be sure to

 

[00:13:22.601]

subscribe to Fidelity Canada's YouTube channel or sign up for the Upside

 

[00:13:26.639]

newsletter to register for upcoming episodes.

 

[00:13:29.141]

Thanks again for watching and we'll see you next time.

 

[00:13:47.960]

Thanks for listening to, or watching, Fidelity Canada's The Upside podcast.

 

[00:13:52.364]

Subscribe on your podcast platform of choice so you don't miss an episode.

 

[00:13:56.302]

If you like what you're hearing please leave a review or a five-star rating.

 

[00:14:00.005]

Fidelity mutual funds and ETFs are available by working with a financial

 

[00:14:03.275]

advisor or through an online brokerage account.

 

[00:14:06.178]

Visit fidelity.ca/howtobuy for more information.

 

[00:14:09.782]

While on fidelity.ca you can also find more information on future live

 

[00:14:13.219]

webcasts. Don't forget to follow Fidelity Canada on LinkedIn, YouTube,

 

[00:14:17.156]

Instagram, or X. We'll wrap things up today with a quick disclaimer.

 

[00:14:21.393]

The views and opinions expressed on this podcast are those of the participants

 

[00:14:24.697]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

[00:14:29.034]

its affiliates. This podcast is for informational purposes only and should

 

[00:14:33.072]

not be construed as investment, tax or legal advice.

 

[00:14:36.175]

It is not an offer to sell or buy or an endorsement, recommendation or

 

[00:14:39.612]

sponsorship of any entity or security cited.

 

[00:14:42.615]

Read a fund's prospectus before investing.

 

[00:14:44.316]

Funds are not guaranteed.

 

[00:14:46.185]

Their values change frequently and past performance may not be repeated.

 

[00:14:49.755]

Fees, expenses and commissions are all associated with fund investments.

 

[00:14:53.959]

Thanks for tuning in. We'll see you next time.

 

[00:34:11.382]

Subtitles are AI-Generated.

 

[00:47:59.343]

Thanks for listening to, or watching, Fidelity Canada's The Upside podcast.

 

[00:48:03.747]

Subscribe on your podcast platform of choice so you don't miss an episode.

 

[00:48:07.684]

If you like what you're hearing please leave a review or a five-star rating.

 

[00:48:11.388]

Fidelity mutual funds and ETFs are available by working with a financial

 

[00:48:14.658]

advisor or through an online brokerage account.

 

[00:48:17.561]

Visit fidelity.ca/howtobuy for more information.

 

[00:48:21.164]

While on fidelity.ca you can also find more information on future live

 

[00:48:24.601]

webcasts. Don't forget to follow Fidelity Canada on LinkedIn, YouTube,

 

[00:48:28.538]

Instagram, or X. We'll wrap things up today with a quick disclaimer.

 

[00:48:32.776]

The views and opinions expressed on this podcast are those of the participants

 

[00:48:36.079]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

[00:48:40.417]

its affiliates. This podcast is for informational purposes only and should

 

[00:48:44.454]

not be construed as investment, tax or legal advice.

 

[00:48:47.557]

It is not an offer to sell or buy or an endorsement, recommendation or

 

[00:48:50.994]

sponsorship of any entity or security cited.

 

[00:48:53.997]

Read a fund's prospectus before investing.

 

[00:48:55.699]

Funds are not guaranteed.

 

[00:48:57.567]

Their values change frequently and past performance may not be repeated.

 

[00:49:01.138]

Fees, expenses and commissions are all associated with fund investments.

 

[00:49:05.342]

Thanks for tuning in. We'll see you next time.