The rules of propriety go hand in hand with your professionalism
As part of the mandates you perform for your clients, you are subject to a number of laws, regulations and standards of conduct that require you to achieve and maintain a level of professionalism that is essential for the protection of the public. Suitability, based on your obligation to know the client and the product, is one of these fundamental rules that you, as a member of the CSF, must respect when making recommendations to your clients1.
Let's take a closer look at the suitability obligation. What steps must an advisor take before recommending a suitable product to their client?
Steps to assess suitability
There are a number of steps that an advisor must take before making a recommendation that meets the client’s needs and situation.
The process can be broken down into three key obligations:
1. Know Your Client;
2. Know Your Product;
3. Duty to Inform.
First, before offering a product or strategy, an advisor must have a complete understanding of their client2. How can you know which product is right without first learning about your client’s personal and financial situation and goals? As a reminder, this first step requires you to diligently obtain the following information from each client: personal situation, financial situation and goals. For the professional, the “Know Your Client” rule is the result of identifying and understanding the client’s characteristics. Consequently, if your client has investment objectives, it will be necessary to obtain additional information in order to establish their investor profile and thus be able to determine their investment horizon and risk tolerance, in addition to their level of financial knowledge.
It’s worth noting that the information gathered to know the client must be accurate, complete and up to date, since the obligation to know the client well is also verified by the quality of each file. As you know, it is perilous to make recommendations based on incomplete information. Despite this obvious fact, recent disciplinary decisions continue to show that this most important of our practices is not respected.
In one case handed down by the disciplinary committee3, an advisor was sanctioned for relying on information provided by his client six months earlier to persuade him to buy segregated funds and take out a loan. Of course, before making any recommendations, the advisor should have verified that the client’s financial situation was current and unchanged.
Product knowledge: don’t overstep your bounds
Following a complementary logic, to ensure the suitability of a product for a client, you also need to know the products you offer inside out.
What’s involved? You should make every effort to understand the features of your product - including its advantages, drawbacks and risks - and be able to explain them clearly. Certain tax features or other special conditions of a product may not be suitable for some clients. Vigilance is essential.
The more complex a client’s situation, the more comprehensive the advisor’s expertise should be. For example, an advisor who does not have sufficient tax expertise should seek the assistance of a tax specialist in order to be able to offer the right product to a client whose situation is more complex and requires this type of expertise4. In this regard, it is strongly recommended that you obtain the necessary help or knowledge by consulting the appropriate specialists or by attending training courses to improve your knowledge.
The Duty to Inform for an informed decision
In the final step, you’ll use the information you’ve gained from your Know Your Client and Know Your Product obligations and exercise your professional judgment to find products or strategies that are right for your client. Your analysis here should allow you to make a “diagnosis”. At this stage, you have a duty to inform your client of the important positive and negative factors associated with your recommendations in order to help them make an informed decision5. Moreover, your obligation is not limited to describing the recommended product; you must also explain to the client how the product offered meets the needs identified and ensure that your client has fully understood the explanations given6.
In addition, the duty to provide information must be modulated according to the client’s level of understanding. Although advisors are obliged to provide complete information to all their clients, the lower a client’s financial literacy, the more rigorous, accessible and detailed the information provided by the advisor must be, and the more important it will be for the client. In this regard, case law has emphasized that it is not enough for an advisor to simply hand out brochures describing a product in order to satisfy their suitability duty. The advisor must ensure that the client fully understands the specifics of a product, especially if they have relatively little experience and knowledge in the area7.
It’s no coincidence that your practice is governed by strict rules: your responsibilities are significant, and your clients need to be properly protected. As a certified professional, you have the skills and knowledge to provide sound advice to your clients. Your advisory role is invaluable in protecting the public.
1 Act respecting the distribution of financial products and services, RLRQ, c. D-9.2, s. 27; Regulation 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, RLRQ c. V-1.1, r. 10, a, 13.3.
2 Code of Ethics of the Chambre de la sécurité financière, RLRQ c. D-9.2, r. 3, s. 15; Regulation respecting the rules of ethics in the securities sector, RLRQ c. D-9.2, r. 7.1, ss. 3 and 4.
3 Chambre de la sécurité financière v. Lou, 2014 CanLII 81697.
4 Code of Ethics of the Chambre de la sécurité financière, RLRQ c. D-9.2, r 3, a. 9.
5 Autorité des marchés financiers v. Dean Evans Service au client privé Inc., 2020 QCTMF 35; Code of Ethics of the Chambre de la sécurité financière, RLRQ c. D-9.2, r 3, s. 13; Regulation respecting the rules of ethics in the securities sector, RLRQ c. D-9.2, r. 7.1, s. 7.
6 Code de déontologie de la Chambre de la sécurité financière, RLRQ c. D-9.2, r 3, a. 14 ; Regulation respecting the rules of ethics in the securities sector, RLRQ c. D-9.2, r. 7.1, a.
7 Chambre de la sécurité financière v. Léger, 2002 CanLII 49161. 19.
We invite you to read the Client relationships - Recommendations section.