The Golden Rule: Fulfilling Your ‘Know Your Client’ Obligations
Means Getting Beyond the KYC Forms
by Ellen Bessner
Originally published in the June 2002 issue of Advisor’s Edge.
The basis for an advisor's professional liability lies with the Know Your Client (KYC)
rule. And, a KYC form or "New Client Application" form, was created to assist advisors
fulfill that professional obligation. But KYC does not begin and end with the completion
of a form. It is a process. If advisors fulfill the KYC process conscientiously, they will not
only fulfill their professional obligation, but will also serve their clients better.
The KYC form contains a list of basic information necessary to become familiar with
each individual client so that investments chosen are suitable for him or her. An advisor
must not just know the client's stock market experience, financial and personal situation,
investment objectives, marital status, family obligations, knowledge and understanding
of risk at the beginning of the relationship. The advisor must be aware of any factors
relevant to a full appreciation of what is required to meet the client's objectives. And, he
or she must also be aware of any changes throughout the relationship with the client.
Clients change with time. They get married, have children, get divorced, get married
again, have more children, pay alimony and support payments, lose jobs, get promoted,
grow older and retire. Their investment goals change over time along with them. A client
who initially was a conservative investor may gain experience throughout the years, and
as a result modifications to the investment objectives become necessary. You must
ensure that the KYC information is updated so the account operates according to the
client's current investment objectives, financial situation and obligations.
Here are ways that you can fulfill the KYC process:
•
Always meet the client face-to-face before the account is opened. Take
notes which include as many points as you can about the client's
background. Then complete the KYC Form.
•
Always write something of significance in the "comment" section of the
KYC form. A client will always provide information outside the realm of
questions on the KYC form. A bit of detail will show the regulators/judge
you were listening and conscientious. Staple your notes which include
information about the client and information imparted to the client to the
KYC Form and put it in the client file.
•
Tell the client that if his or her personal situation changes, the investment
plan must be adjusted. Ask the client to contact you with changes as they
occur.
-2•
Send the signed (by client) KYC form to the client each time it is updated,
and include a personal cover letter. This will ensure you fulfill your duty
and will remind the client that you are servicing him or her.
•
Update the KYC form periodically. Have a "tickler system" that brings each
client's KYC form to your attention each year. Use the opportunity to meet
with the client. Remember, out of sight, out of mind. Ask the client if he or
she is satisfied with the relationship and if any circumstances have
changed. If the client is too busy to meet, send a letter confirming the
attempt to set up a meeting and send a copy of the KYC form he or she
signed the year before.
You must be fully aware of any changes and adjust the investments in the client
account. If you follow the KYC process and continue to paper the client file accordingly,
then if a client issues a complaint, you will be able to produce documentation to show
that you knew your client. And, if the account operated suitably, you will avoid penalties,
damages as well as bad publicity.
The KYC form is not a contract. The KYC form is not an agreement between you and
the client. It is simply one of many tools you use to fulfill your on-going regulatory
obligation to know your client. The KYC process begins when you first meet the client
and doesn't end until the account for a general audience and should not be considered
legal advice.