Know-Your-Client
& Suitability

The Client Relationship Model (CRM)

The Client Relationship Model is a set of regulatory reforms introduced by the Canadian Securities Administrators (CSA) and enforced through CIRO that fundamentally changed how investment dealers must interact with clients. CRM introduced clear rules around pre-trade disclosure, account statements, performance reporting, and fee transparency.

Under CRM, a Registered Representative (RR) must, before or at account opening:

• Disclose the nature of the relationship — Is the firm acting as an agent or a principal? What services are offered?
• Disclose all fees, charges, and compensation — including commissions, trailer fees, charges, and account fees.
• Describe all conflicts of interest — including proprietary products, referral arrangements, and compensation structures.
• Provide ongoing reporting — annual performance reports, cost reports, and regular account statements.

Trust, Agency, and Conflicts of Interest

Trust

The client–RR relationship is built on trust. Clients entrust their financial futures to their advisors. This creates both a legal duty of care and an ethical obligation to act in the client's best interest — not just to recommend suitable products, but to put the client's interest first (the enhanced suitability standard introduced by the Client Focused Reforms, effective June 2021).

Agency

When an RR acts as an agent, they are acting on behalf of the client to execute trades in the market. The dealer does not own the securities being bought or sold — they facilitate the transaction. This is the typical relationship in an advisory account.

When a dealer acts as a principal, the firm is buying from or selling to the client directly from its own inventory. This is common in fixed income (bond) trading. When acting as principal, the dealer must disclose this and ensure the price is fair.

Conflicts of Interest (COI)

A conflict of interest exists whenever the interests of the RR or firm could interfere with their duty to act in the client's best interest. Under the Client Focused Reforms (CFRs), firms must identify, address, and disclose all material conflicts.

• Identify: Proactively look for situations where interests diverge — e.g., recommending a proprietary fund that pays higher trailer fees.
• Address: Determine how to resolve the conflict in the client's favour. Not all conflicts can be disclosed away — some must be avoided entirely.
• Disclose: If the conflict cannot be avoided, it must be clearly explained to the client in a way they can understand.

Common examples of conflicts of interest:

• Recommending proprietary mutual funds that generate higher revenue for the dealer
• Referring clients to affiliated companies (insurance, mortgage) for referral fees
• Selling securities from the firm's inventory (acting as principal)
• Receiving gifts or entertainment from product manufacturers
• Being personally invested in a security recommended to clients

Clients Residing in the United States — Snowbirds & Foreign Jurisdictions

Canadian RRs are not automatically permitted to deal with clients who reside outside of Canada. Serving US-resident clients raises cross-border regulatory issues governed by both CIRO rules and US securities law (primarily the Securities Exchange Act of 1934 and FINRA rules).

The "Snowbird" Issue

A snowbird is a Canadian who spends part of the year in the US (typically winters in Florida, Arizona, etc.) but is not a US resident for regulatory purposes. The key question is: where does the client legally reside?

Serving US-Resident Clients

To legally deal with US-resident clients, a Canadian dealer typically must either:

• Be registered with the SEC or FINRA in the US, OR
• Qualify for the International Dealer Exemption (available in some US states for dealing with major institutional clients), OR
• Rely on firm-specific policies that restrict what products/services can be offered to US residents.

Considerations for Changes in Residence

When a client changes their province or country of residence, the RR must take specific steps:

• Update KYC immediately — Change of address, tax residency, and applicable provincial securities laws must be updated promptly.
• Reassess account suitability — Provincial rules can differ (e.g., Québec has different regulations via the AMF). Some products may not be eligible for sale in the new province.
• Notify compliance — Any cross-border relocation (especially to the US) must be reported to the compliance department, as it may trigger a restriction or closure of the account.
• Tax residency changes — A change of country may affect withholding taxes, RRSP contribution room (non-residents lose RRSP contribution room), and TFSA eligibility (non-residents cannot contribute to TFSAs).

Financial Circumstances

Income

Income is the client's regular flow of money — salary, business income, pension, CPP/OAS, rental income, dividends, etc. Understanding income helps assess:

• Whether the client can sustain ongoing contributions to their portfolio
• How dependent they are on investment returns to fund their lifestyle
• Their marginal tax bracket (which affects product selection — e.g., Canadian dividends are tax-advantaged for higher earners)

Liquidity Needs

Liquidity refers to how quickly a client may need to convert investments to cash. A client with high liquidity needs (upcoming tuition, home purchase, medical expenses) should hold more liquid assets and should not be placed in illiquid investments like limited partnerships, private equity, or long-term locked-in GICs.

Financial Assets

This includes the total value of all investment accounts — RRSP, TFSA, non-registered, RESP, pension plans, company stock options, business interests, real estate (non-primary), GICs, and any other investable assets. This provides the full investment picture and is essential for portfolio construction and asset allocation.

Liabilities

Liabilities include mortgages, car loans, credit card debt, student loans, margin loans, business debt, and personal guarantees. High liabilities relative to assets reduce risk capacity and liquidity. An RR must understand the complete debt picture to avoid recommending investments that could be jeopardized by debt servicing obligations.

Net Worth

Net worth = Total Assets − Total Liabilities. Net worth is a key indicator of financial stability and risk capacity. A client with high net worth can generally absorb more investment loss without it materially affecting their lifestyle.

Borrowing to Invest (Leveraged Investing)

If a client is borrowing money to invest (using a margin account, home equity line of credit, or investment loan), this creates significant additional risk. The RR must:

• Specifically document that the client is borrowing to invest
• Assess whether this is suitable given the client's risk profile
• Ensure the client understands that losses are amplified when leverage is used — they must still repay the loan even if the investment loses value
• Recommend only investments with sufficient expected return to justify the borrowing cost

Personal Circumstances

Personal circumstances include all non-financial details that affect the client's investment needs and suitability. Key factors include:

Investment Knowledge

Investment knowledge assesses how well the client understands financial products, markets, and risk. CIRO typically categorizes knowledge as:

• None / Limited: Little to no investing experience; needs full explanation of all products and risks
• Good: Some experience, understands basic concepts (stocks, bonds, mutual funds, risk/return)
• Sophisticated: Experienced investor who understands complex products including options, derivatives, leveraged ETFs

Investment knowledge is separate from risk tolerance. A client can have low knowledge but a high risk tolerance (which actually increases suitability risk) or vice versa. The RR must not assume that a client who is willing to take risk also understands the risks they're taking.

Investment Objectives, Constraints, & Time Horizon

Investment Objectives

Investment objectives describe what the client wants to achieve with their portfolio. The most common objectives are:

Investment Constraints & Restrictions

Clients may have specific restrictions on what they want or are willing to hold. The Client Focused Reforms now explicitly require RRs to consider these:

Equity, Diversity & Inclusion (EDI) Considerations

Some clients may wish to invest in companies or funds that prioritize diversity in leadership, equitable employment practices, and inclusive business models. While not strictly ESG (which is environmental/social/governance), EDI focuses specifically on workforce and governance diversity metrics.

Environmental, Social & Governance (ESG) Criteria

ESG investing has grown dramatically in Canada. Clients may wish to exclude certain sectors (fossil fuels, tobacco, weapons) or specifically include companies with high ESG ratings. The RR must document these preferences and apply them to product selection. Key points:

• ESG preferences are not a replacement for financial suitability — an ESG-screened portfolio must still meet the client's risk, return, and liquidity objectives
• There is no single universal ESG standard — different ratings agencies (MSCI, Sustainalytics) use different methodologies
• Greenwashing is a compliance risk — do not describe products as "ESG" without substantiation
• SRI (Socially Responsible Investing) and ESG are related but not identical terms

Other Personal Preferences

A client may have religious investing constraints (e.g., Shariah-compliant investing which prohibits interest-bearing instruments and certain industries), ethical preferences, or cultural values that shape their investment decisions. These must be documented and respected.

Investment Time Horizon

The time horizon is the period over which the client expects to keep their money invested before needing it. Time horizon is one of the most critical factors in suitability because it directly affects how much short-term volatility the portfolio can absorb.

Risk Tolerance — Willingness to Accept Risk

Risk tolerance is a psychological construct — it measures how emotionally and mentally comfortable a client is with the possibility of losing money or seeing their portfolio decline in value. It is influenced by:

Risk Capacity — Ability to Endure Financial Loss

Risk capacity is the objective, financial measurement of how much loss a client can actually afford to sustain without material impact on their life goals or financial obligations. Unlike risk tolerance (which is psychological), risk capacity is determined by hard financial facts:

• Financial situation: Net worth, income stability, and existing assets. A client with $2M in assets who needs $50K/year to live has more capacity to absorb losses than one with $150K who needs $60K/year.
• Current investments: Is the portfolio being assessed the client's only savings, or one of many? A concentrated bet in a single account is riskier when no other assets exist.
• Investment horizon: Longer time horizons = higher capacity, because markets tend to recover over time. Short horizons dramatically reduce capacity.
• Need for liquidity: If the client may need the money back quickly, capacity for risk is reduced. Illiquid or volatile investments are inappropriate.

Risk Need — How Much Risk Is Required to Meet Goals

Risk need asks the question: What rate of return does the client need to achieve their financial goals, and how much risk must they take to potentially achieve that return?

Resolving Conflicts Between Client Expectations and Risk Profile

It is common for a client's stated wishes to conflict with their assessed risk profile. For example:

• Client says "I want 20% returns" but has a short time horizon and low net worth (expectations vs. capacity conflict)
• Client wants to avoid all risk but needs 7% returns to meet retirement goals (tolerance vs. need conflict)
• Client checks "high risk" on questionnaire but panics at the first 10% drawdown (stated vs. revealed preference conflict)

The RR's obligations when conflicts arise:

How to Establish a Trusted Contact Person

At or before account opening, the RR must make reasonable efforts to have the client name a trusted contact person. The TCP is not required — but the RR must attempt to obtain one and document the attempt. To establish a TCP:

• Explain to the client what a TCP is and why it is beneficial
• Request the TCP's full name, relationship to the client, and contact information (phone number, email)
• Have the client consent in writing to the TCP designation
• Record the TCP information in the client file

What a TCP Permits — and What It Does NOT Permit

If the Client Refuses to Provide a TCP

If a client refuses to provide a trusted contact person, the RR:

• Must not deny account opening or service solely because the client refused
• Must document the refusal in the client file (this becomes a "record of trusted contact person refusal")
• Should attempt again at the next KYC review

When to Contact the Trusted Contact Person

The TCP should be contacted when the RR has reasonable grounds to believe one of the following:

• The client may be experiencing financial exploitation (e.g., unusual large withdrawals, pressure from a third party, suspicious transaction requests)
• There are concerns about the client's mental capacity to make financial decisions (cognitive decline, dementia, confusion)
• The client cannot be reached and there is concern for their well-being

Recognizing Financial Exploitation & Capacity Concerns

Red Flags for Financial Exploitation

• Sudden large, unusual withdrawals especially to third parties
• A third party appearing to control or direct client decisions
• Client appears fearful, confused, or under duress when giving instructions
• Client requests to transfer funds to someone claiming to be a government official, CRA, or law enforcement
• Account activity inconsistent with the client's established patterns
• Requests for gift cards, cryptocurrency, or wire transfers to unfamiliar accounts

Red Flags for Capacity Concerns

• Client forgets recent discussions or instructions they gave
• Client makes inconsistent or contradictory decisions
• Client appears confused about the nature or value of their accounts
• Noticeable deterioration in the client's ability to understand financial concepts they previously understood
• Third party begins attending all meetings and answering on behalf of the client

Temporary Holds

A temporary hold allows an RR (or the dealer) to temporarily delay processing a transaction or disbursement when there are reasonable grounds to believe that the client is being financially exploited or lacks the capacity to make the decision. Key conditions:

Advisory (Non-Managed) Accounts

In an advisory account, the RR provides recommendations and advice, but the client makes all final investment decisions. The RR does not have discretion to trade without client approval for each transaction.

Fee-Based Advisory Accounts

Instead of charging a commission per trade, the client pays a flat percentage fee (typically 1–2% of assets under management annually). This aligns the RR's compensation with account growth rather than trading volume.

• Advantage: Reduces conflict of interest (RR not incentivized to churn the account)
• Advantage: Predictable cost for clients who trade frequently
• Disadvantage: Can be expensive for clients who rarely trade or hold long-term static portfolios
• Disadvantage: Even in flat/down markets, the fee is still charged

Commission-Based Advisory Accounts

The RR earns a commission for each transaction executed. The commission must be disclosed and is typically a percentage of the trade value or a flat fee per trade.

• Advantage: Client only pays when transactions occur; better for buy-and-hold investors
• Disadvantage: Creates conflict of interest — RR may be incentivized to trade more (churning)
• Regulatory safeguard: Excessive trading (churning) is prohibited and results in regulatory action

Managed Accounts

A managed account is one where a Portfolio Manager (PM) or registered individual has been granted authority to make investment decisions without requiring client approval for each trade. This is a higher level of service typically for clients with larger portfolios.

Key Features of Managed Accounts:

• Client signs an Investment Policy Statement (IPS) setting out objectives, risk profile, and constraints
• The PM has full discretion within the IPS parameters
• KYC must be reviewed annually (more frequently than advisory accounts)
• Performance reporting is on a money-weighted return (MWR) basis
• Higher regulatory obligations on the PM (portfolio manager registration required)

Discretionary Accounts

A discretionary account is one where the RR or dealer has been given written authority by the client to make investment decisions without consulting the client for each trade. This is similar to a managed account but the term is sometimes used more broadly in the industry.

Cash Accounts vs. Margin Accounts

How Margin Works — Example