Client Discovery, Suitability and Investment Policy

Introduction

Investment management begins before a security is selected. It begins with understanding the client: who the client is, what the client is trying to achieve, what losses the client can withstand, what restrictions apply, and how decisions will be governed over time. In investment banking and wealth management, weak client discovery can produce unsuitable recommendations, regulatory breaches, reputational damage and financial loss, even when the underlying investment product is well designed.

Client discovery is therefore both a commercial and fiduciary activity. It supports an adviser’s understanding of the client, enables the institution to meet know-your-customer (KYC) and anti-money-laundering (AML) obligations, and provides the evidence needed to demonstrate that advice or portfolio management is suitable. The principal output is an investment policy statement (IPS), supported where relevant by an investment management agreement, mandate and documented suitability assessment.

The chapter distinguishes risk capacity from risk tolerance and risk perception; explains the relationship between goals, constraints and portfolio design; and presents a professional process for converting client information into an implementable investment policy.

Learning Objectives

By the end of this chapter, the reader should be able to:

1. Explain the purpose and sequence of client onboarding, KYC and needs analysis.
2. Distinguish identity verification, source-of-wealth review, source-of-funds review and suitability assessment.
3. Analyse goals, time horizon, liquidity, taxation, legal constraints and other investment restrictions.
4. Differentiate risk capacity, risk tolerance and risk perception.
5. Use a structured framework to assess suitability and document recommendations.
6. Prepare the principal sections of an investment policy statement and investment mandate.
7. Identify ethical, governance, regulatory and technology-related risks in client discovery.

1. The Client-Discovery Process

Client discovery is a structured investigation of the client’s circumstances, objectives and preferences. It should be sufficiently detailed to support a defensible investment decision, but proportionate to the complexity and risk of the relationship. A private individual with a simple taxable portfolio requires a different level of analysis from a family office, pension fund, charitable foundation or corporate treasury.

A robust process normally follows these stages:

1. Initial contact and conflict screening. The firm identifies the proposed relationship, checks whether it can serve the client, and screens for conflicts of interest, sanctions and restricted relationships.
2. Client identification and verification. The firm establishes the client’s legal identity, ownership and authority to act.
3. KYC and AML assessment. The firm determines the client’s risk profile, beneficial ownership, expected account activity and source of wealth and funds.
4. Needs analysis. The adviser gathers information about objectives, resources, liabilities, dependants, liquidity, time horizon, taxation and restrictions.
5. Risk assessment. The adviser evaluates risk capacity, tolerance and perception rather than relying on a single questionnaire score.
6. Suitability analysis. The proposed strategy, products and services are tested against the client’s circumstances.
7. Documentation and approval. The findings are recorded, reviewed and approved according to the institution’s governance framework.
8. Implementation and monitoring. The account is opened, the portfolio is implemented and the client’s circumstances are reviewed periodically and after material events.

Client discovery is not a one-time interview. It is a continuing process because income, family circumstances, tax status, liabilities, objectives and attitudes toward risk can change.

2. KYC, AML and Client Onboarding

2.1 Know your customer

KYC establishes who the client is and whether the firm understands the client sufficiently to provide its services. For an individual, typical information includes legal name, date of birth, residential address, nationality, tax residence, occupation and government identification. For a legal entity, information may include incorporation documents, registered address, directors, authorised signatories, ownership structure, beneficial owners and the purpose of the account.

The firm must distinguish the legal client from persons connected with the account. A trustee, director, guardian, attorney or investment committee may have authority to act without being the beneficial owner. Beneficial ownership and control must be identified according to applicable law and institutional policy.

2.2 AML and counter-terrorist-financing controls

AML procedures seek to prevent the financial system from being used to conceal proceeds of crime or finance prohibited activities. Core elements include:

• customer due diligence and, where necessary, enhanced due diligence;
• verification of identity and beneficial ownership;
• understanding the purpose and expected nature of the relationship;
• screening against sanctions, politically exposed person (PEP) and adverse-media databases;
• establishing source of wealth and source of funds where required;
• monitoring transactions and activity for inconsistency or suspicious patterns; and
• escalation and reporting under applicable law.

Source of wealth concerns how the client accumulated total wealth—for example, business ownership, employment, inheritance or sale of property. Source of funds concerns the origin of the money being invested—for example, a bank account, sale proceeds or dividend payment. These concepts are related but not interchangeable.

A high net worth does not itself establish legitimacy, and a client’s professional status does not eliminate the need for verification. Documentation should be current, internally consistent and proportionate to the risk of the relationship.

2.3 Suitability is not the same as KYC

KYC answers questions about identity, ownership, legitimacy and expected activity. Suitability asks whether a proposed recommendation or service is appropriate for the client’s objectives, financial situation, knowledge, experience and ability to bear loss. A client can pass KYC but still be unsuitable for a particular complex or illiquid investment. Conversely, a client may have suitable investment objectives but fail AML requirements and therefore be unable to open or maintain an account.

3. Needs Analysis: From Facts to Objectives

3.1 Financial position

The adviser should prepare a reliable balance-sheet view of the client. Relevant assets include cash, deposits, listed securities, retirement assets, real estate, business interests and insurance-related assets. Liabilities include mortgages, consumer debt, margin borrowing, guarantees, tax obligations and contingent liabilities.

A simplified net-worth identity is:

Net worth is not the same as investable wealth. A primary residence, closely held business or inherited asset may contribute to net worth but may not be readily available for portfolio investment. The adviser should therefore distinguish total wealth, financial wealth, investable assets and liquid assets.

Cash-flow analysis is equally important. A client with substantial assets may have limited capacity to absorb portfolio losses if regular expenses exceed income. The analysis should include employment or business income, pensions, rental income, taxes, insurance premiums, education costs, healthcare costs and expected capital expenditures.

3.2 Goals and prioritisation

Goals should be expressed in operational terms rather than vague aspirations. A useful goal statement identifies:

• the objective, such as retirement, education, home purchase, philanthropy or intergenerational transfer;
• the amount required, stated in current or future monetary terms;
• the target date or time range;
• the priority, such as essential, important or aspirational;
• the funding source; and
• the consequence of failure.

Goals can conflict. A client may want maximum current income, rapid capital growth, a high charitable commitment and a low probability of loss. The adviser’s role is not to promise that all objectives can be achieved simultaneously, but to expose trade-offs and establish priorities.

3.3 Time horizon

Time horizon is the period over which capital is expected to remain invested before it is needed. It may be:

• single-stage, where all funds are required at one date;
• multi-stage, where withdrawals occur at several dates; or
• rolling, where assets support continuing spending over an uncertain lifetime.

A long overall horizon does not justify aggressive investment if a substantial withdrawal is required soon. Portfolio design should consider the horizon of each goal and the sequence of cash flows. A retirement portfolio, for example, may contain a near-term spending reserve, an intermediate allocation for expected withdrawals and a long-term growth allocation.

3.4 Liquidity

Liquidity is the ability to convert an asset into cash, in the required amount and time, without an unacceptable reduction in value. It has at least three dimensions: market liquidity, funding liquidity and contractual liquidity. A listed security may be readily tradable, whereas a private fund may impose a lock-up, notice period or redemption gate.

A practical liquidity analysis asks:

• What minimum cash reserve is required?
• Which withdrawals are foreseeable and which are contingent?
• Are liabilities denominated in a different currency from assets?
• Could a market decline coincide with a forced sale?
• Are there collateral or margin requirements?

Liquidity needs can be represented as a schedule rather than a single percentage. The schedule should identify amount, date, confidence level and acceptable source of funding.

3.5 Taxation

Tax is a client-specific constraint, not merely an afterthought. The adviser should identify tax residence, account type, marginal tax considerations, capital gains treatment, dividend and interest taxation, withholding taxes, loss utilisation, estate or inheritance considerations and the tax treatment of charitable or trust structures. Tax advice may require a qualified tax professional, particularly in cross-border situations.

Portfolio choices should be evaluated on an after-tax basis where tax is material. If an investment produces a pre-tax return of 6% and the applicable effective tax rate on that return is 25%, the simplified after-tax return is:

For this simplified example, the result is 6% × (1 − 0.25) = 4.5%. The expression assumes that the tax rate applies fully to the return, ignores timing differences, tax credits, losses, transaction taxes and compounding effects, and should not be treated as a universal tax calculation.

3.6 Legal, ethical and personal constraints

Constraints may arise from trust documents, shareholder agreements, employment restrictions, religious principles, environmental or social preferences, concentrated legacy holdings, foreign-exchange controls, regulatory restrictions or the client’s need to avoid particular industries. The adviser should distinguish a legally binding restriction from a preference and record the consequence of each constraint for diversification, cost and expected risk.

4. Understanding Investment Risk

Risk is multidimensional. It includes the possibility of permanent capital loss, temporary price volatility, failure to meet a goal, inflation erosion, credit default, liquidity impairment, currency loss, model error, operational failure and behavioural mistakes.

4.1 Risk capacity

Risk capacity is the objective financial ability to absorb losses without jeopardising essential goals or financial security. It depends on wealth, income stability, liabilities, insurance, time horizon, liquidity needs and the flexibility of spending.

A client with stable income, low liabilities and a distant goal may have high risk capacity. A wealthy client who requires a large payment next year may have low risk capacity for the assets funding that payment. Risk capacity is therefore goal-specific rather than a permanent personal label.

4.2 Risk tolerance

Risk tolerance is the client’s willingness to accept uncertainty and potential loss in pursuit of return. It is psychological and behavioural. Two clients with identical balance sheets may have different tolerance because of experience, values, personality or previous investment outcomes.

Tolerance can be assessed through structured questions, scenario analysis and observed behaviour. A client who claims to accept high risk but sells during modest market declines may have overstated tolerance or misunderstood the question.

4.3 Risk perception

Risk perception is the client’s subjective interpretation of risk. It can be shaped by media coverage, recent market performance, social networks, personal experience and the way a product is described. Perception may be inaccurate: a familiar asset can seem safe even when concentrated, while a diversified fund can seem dangerous because its price is quoted daily.

The professional task is not to dismiss perception but to explore it. The adviser should explain possible outcomes, distinguish volatility from permanent loss, and test whether the client understands the consequences of the recommendation.

4.4 Reconciling the three concepts

A suitable strategy cannot normally exceed the lower of capacity and tolerance for the relevant goal. This is a decision rule, not a mathematical law. If a client has high tolerance but low capacity, the portfolio must be constrained by capacity. If capacity is high but tolerance is low, the adviser should not impose an aggressive strategy merely because the client could financially withstand it.

Risk questionnaires are useful evidence but not a substitute for professional judgement. They should be supplemented by:

• loss scenarios, such as a 10%, 20% or 30% decline;
• time-to-recovery discussions;
• liquidity and forced-sale analysis;
• questions about prior investment decisions;
• assessment of product knowledge and complexity; and
• documented reconciliation of contradictory answers.

5. Suitability Assessment

Suitability links the client’s profile to the proposed service, strategy, product and transaction. A suitable recommendation should be explainable in terms of the client’s objectives, financial situation, knowledge, experience, constraints and risk profile.

A useful suitability sequence is:

1. Define the client’s priority goals and required cash flows.
2. Identify the assets and liabilities supporting those goals.
3. Establish the relevant horizon and liquidity requirement.
4. Assess capacity, tolerance and understanding of risk.
5. Determine permissible asset classes, products and implementation methods.
6. Compare alternatives, including the option of not investing.
7. Evaluate costs, taxes, conflicts and expected consequences.
8. Document the rationale, disclosures and client approval.

Suitability must be assessed at the correct level. A diversified portfolio may be suitable overall while an individual leveraged or illiquid product within it is unsuitable. Conversely, a risky asset may be suitable as a small satellite holding but unsuitable as the core portfolio.

Product complexity and client knowledge

Complexity creates an additional suitability concern. Structured products, derivatives, private markets, leveraged funds and alternative strategies may involve path dependence, embedded options, valuation uncertainty, limited liquidity or loss beyond the initial expectation. The adviser should establish whether the client understands the payoff, risks, fees, liquidity terms and worst-case outcomes.

Costs and conflicts

Costs reduce the client’s net outcome and can influence suitability. Relevant costs include management fees, performance fees, transaction costs, spreads, custody charges, platform fees, fund expenses, taxes and exit charges. Conflicts may arise from commissions, proprietary products, allocation incentives, investment-banking relationships or revenue-sharing arrangements. Conflicts should be identified, controlled, disclosed where required and never allowed to override the client’s interests.

6. The Investment Policy Statement

An IPS is a formal document that translates the client’s circumstances and objectives into investment rules. It promotes continuity when personnel change, limits ad hoc decisions, supports monitoring and provides evidence of agreed responsibilities. It is not a forecast and does not guarantee performance.

A comprehensive IPS commonly includes the following sections:

Return objectives

Return objectives should be realistic and connected to goals. A nominal return target should not be confused with a real return target. If inflation is approximately 3% and the desired real return is 2%, the exact nominal return required under annual compounding is:

Using the stated assumptions, the nominal return is (1.02 × 1.03) − 1 = 5.06%. The commonly used approximation of adding 2% and 3% gives 5%, but the exact compounded result is 5.06%. The formula assumes matching periods and a stable inflation rate; actual outcomes may differ.

Strategic asset allocation and ranges

The IPS should specify strategic weights and permissible ranges rather than relying on informal preferences. For example, a portfolio might have a long-term target of 50% diversified equities, 35% fixed income and 15% cash and diversifiers. Ranges may permit temporary movement caused by market performance or cash flows. The ranges must be sufficiently narrow to preserve the intended risk profile and sufficiently broad to avoid unnecessary trading.

Asset allocation should be expressed consistently. If weights are based on market value, the total should equal 100% of the relevant portfolio value. Derivatives, borrowing and look-through exposure should be addressed explicitly; otherwise apparent weights can understate economic risk.

Rebalancing

Rebalancing restores the portfolio toward policy weights. It may be calendar-based, threshold-based or a combination. A threshold rule can reduce unnecessary transactions but may create tax costs or realise losses. The IPS should state who authorises deviations, how cash flows are used and when exceptional market conditions justify temporary suspension.

Mandates and delegated authority

An investment mandate is the operational expression of the IPS. It should specify the manager’s authority, permitted instruments, prohibited activities, leverage limits, concentration limits, liquidity requirements, reporting standards, custody arrangements and escalation procedures. It should also define whether the manager has discretionary authority or must obtain approval before transactions.

7. Worked Application: Translating Discovery into Policy

The following is an illustrative case, not advice to a real client.

Background

A 58-year-old business owner has investable assets of $2.4 million, annual after-tax income of $180,000 and a mortgage of $250,000. The client expects to retire in seven years and requires $90,000 annually from the portfolio beginning at retirement. A child’s university funding of $120,000 is expected in three years. The client also holds a large, illiquid interest in the operating business and wants to retain it until a planned sale.

Problem

The client describes their risk tolerance as “high” because the business has historically produced strong returns. However, the near-term education payment, planned retirement withdrawals, mortgage liability and concentration in the business reduce financial flexibility. The adviser must determine whether the proposed investment portfolio can tolerate substantial equity exposure.

Analysis

The education payment is a high-priority, three-year liability. It should not depend primarily on assets whose value could fall sharply at that date. Retirement funding has a seven-year accumulation horizon followed by a withdrawal phase. The business interest is economically risky and illiquid, even if it is not recorded inside the investment account. Therefore, the client’s total economic exposure—not merely the managed portfolio—must be considered.

The client’s high stated tolerance is not sufficient to justify a high-risk portfolio. The adviser explains a 25% decline scenario and asks how the client would respond if the education payment were due during the decline. The client confirms that the payment must be made and that selling the business is not an acceptable emergency source of funds. This evidence indicates moderate risk capacity for the managed assets, despite relatively high psychological tolerance.

Approach and solution

The adviser proposes three functional pools:

1. Near-term education reserve: high-quality liquid instruments matched to the expected payment.
2. Retirement reserve: a diversified portfolio with a moderate growth objective, adequate fixed-income and cash exposure, and controlled equity risk.
3. Long-term capital: a smaller growth allocation for assets not required for at least ten years.

The IPS records the education payment as a priority liability, identifies the business as a concentrated external exposure, prohibits borrowing in the managed account, requires quarterly reporting and triggers review after a business sale, change in employment income, major health event or material tax change.

Outcome

The resulting policy does not attempt to maximise expected return in isolation. It aligns the portfolio with the timing and importance of liabilities, reduces the probability of a forced sale and makes the client’s concentrated business exposure visible in the overall risk assessment.

Learning points

• Risk is assessed at the level of the client’s total economic position.
• A long overall horizon can contain short, binding liabilities.
• Stated risk tolerance must be tested against realistic scenarios.
• Liquidity and goal priority can be more important than an abstract return target.
• The IPS converts analysis into repeatable governance and implementation rules.

8. Governance, Ethics and Regulation

Client discovery involves sensitive personal, financial and behavioural information. Firms should apply data minimisation, access controls, retention rules, secure communication and clear consent procedures. Personal data should be used for legitimate purposes and shared only with authorised parties.

Ethically, advisers should avoid unsuitable optimism, selective presentation of performance, unexplained jargon and pressure to purchase proprietary products. A recommendation should communicate material risks, costs, uncertainty and conflicts in a form the client can reasonably understand. Vulnerable clients may require additional safeguards, such as involving an authorised representative, allowing additional decision time or escalating unusual instructions.

Governance should include four-eyes review for higher-risk relationships, documented overrides of questionnaire results, periodic file testing, complaint analysis and controls over gifts, commissions and referral arrangements. The exact legal obligations vary by jurisdiction; firms must follow applicable securities, AML, privacy, tax and conduct rules rather than relying on a generic global process.

9. Technology and Contemporary Practice

Digital onboarding can improve speed and consistency through electronic identity verification, automated document collection, workflow controls and transaction monitoring. However, automation does not eliminate judgement. False positives, incomplete data, identity fraud, biased risk questionnaires and model errors can produce unsuitable outcomes.

Artificial intelligence may assist with document classification, meeting transcription, anomaly detection and consistency checks. Its use should be governed by human oversight, explainability, data-quality controls, access restrictions, testing for bias and clear accountability. An AI-generated client profile should never be treated as authoritative without validation against source documents and client discussion.

Contemporary wealth management also increasingly addresses sustainable-investment preferences, digital assets, private-market exposure, cyber risk, longevity risk and cross-border complexity. These developments expand the discovery process but do not change its central principle: recommendations must be connected to the client’s objectives, constraints and ability to bear consequences.

10. Limitations and Best Practices

No discovery process can predict markets or eliminate uncertainty. Self-reported information may be incomplete, clients may change their minds, tax laws may change and risk models may fail during stressed conditions. A portfolio may be suitable when recommended but become unsuitable after a major life event or market movement.

Best practices include:

• use a consistent but adaptable discovery framework;
• separate facts, client preferences, adviser judgement and assumptions;
• obtain documentary evidence for material financial information;
• analyse goals by date, amount and priority;
• assess the client’s total economic exposure, including external assets and liabilities;
• test risk responses with scenarios rather than relying on labels;
• document product, fee, tax, liquidity and conflict analysis;
• write IPS provisions that are specific enough to implement and monitor;
• establish review triggers, not only annual review dates; and
• maintain an auditable record of changes, approvals and communication.

Chapter Summary

Client discovery is the foundation of responsible investment advice and portfolio management. It combines onboarding, identity verification, AML and KYC controls with a detailed analysis of financial resources, goals, liquidity, time horizon, taxation, legal restrictions and personal preferences. KYC establishes who the client is and whether the relationship is legitimate; suitability determines whether a service, strategy or product is appropriate.

Risk capacity is the objective ability to withstand loss, risk tolerance is the willingness to accept uncertainty, and risk perception is the client’s subjective interpretation of risk. These concepts must be assessed together and reconciled with goal-specific liabilities. A risk questionnaire is evidence, not a substitute for professional judgement.

The investment policy statement converts discovery into governance. It should specify objectives, horizons, risk parameters, liquidity, constraints, asset-allocation ranges, rebalancing, benchmarks, responsibilities and review triggers. A well-designed IPS improves consistency, transparency and accountability, while a well-designed mandate gives the investment manager operational authority within defined limits. Ethical conduct, data protection, conflict management and human oversight of technology are essential to maintaining client trust and regulatory compliance.

Key Terms

KYC: Know-your-customer procedures used to identify and understand a client.

AML: Anti-money-laundering controls intended to prevent misuse of the financial system.

Beneficial owner: The person who ultimately owns or controls an asset or entity.

Source of wealth: The origin of a client’s accumulated wealth.

Source of funds: The origin of money used for a particular investment or transaction.

Suitability: The assessment of whether a recommendation or service is appropriate for a client.

Risk capacity: The objective financial ability to absorb investment loss.

Risk tolerance: The willingness to accept investment uncertainty and loss.

Risk perception: The client’s subjective interpretation of investment risk.

Liquidity: The ability to obtain cash promptly without unacceptable loss of value.

Time horizon: The period until capital is required for a stated purpose.

Investment objective: The financial outcome the client seeks from investing.

Constraint: A legal, financial, tax, ethical or personal limit on investment decisions.

Investment policy statement: A formal document defining investment objectives, rules and responsibilities.

Strategic asset allocation: Long-term target weights assigned to asset classes.

Rebalancing: The process of restoring portfolio weights toward policy targets.

Investment mandate: The operational authority and restrictions given to an investment manager.

Concentration risk: The risk arising from excessive exposure to one asset, issuer, sector or source of wealth.

Due diligence: Investigation undertaken to verify information and assess risk.

Conflict of interest: A situation in which competing interests may impair objective client service.

Review Questions

Short Answer Questions

1. What is the difference between source of wealth and source of funds?
2. Why is KYC not equivalent to suitability assessment?
3. Define risk capacity and explain why it may be goal-specific.
4. List four important sections of an investment policy statement.
5. What is the purpose of rebalancing rules in an IPS?

Long Answer Questions

1. Explain the complete client-onboarding process from initial contact to ongoing review.
2. Discuss how goals, liquidity, time horizon and taxation interact in portfolio design.
3. Distinguish risk capacity, risk tolerance and risk perception, and explain how an adviser should reconcile conflicting evidence.
4. Describe the structure and governance role of an investment policy statement.
5. Analyse the ethical and regulatory risks associated with conflicts of interest and automated client profiling.

Analytical / Application Questions

1. A client has high income and substantial assets but requires 40% of the portfolio in two years for a property purchase. Analyse the client’s risk capacity for that amount and propose discovery questions.
2. An investor scores as high-risk on a questionnaire but previously sold all equities after a 12% decline. Explain how the adviser should investigate and document this inconsistency.
3. Design the principal IPS provisions for a family whose goals include a near-term education payment, long-term retirement growth and a strong prohibition on investments in certain industries.

Multiple Choice Questions with Answers

Question 1

Which statement best distinguishes source of wealth from source of funds?

A. Source of wealth concerns total accumulated wealth, while source of funds concerns money used for a particular transaction.

B. Source of wealth applies only to companies, while source of funds applies only to individuals.

C. Source of wealth verifies investment performance, while source of funds measures portfolio risk.

D. They are identical terms used in different jurisdictions.

Correct Answer: A. Source of wealth concerns total accumulated wealth, while source of funds concerns money used for a particular transaction.

Question 2

A client has high willingness to accept risk but must make a large payment in six months. Which factor most directly constrains the portfolio for that payment?

A. Risk perception

B. Risk capacity

C. Investment experience

D. Historical return preference

Correct Answer: B. Risk capacity

Question 3

Which document converts a client’s objectives and constraints into formal investment rules?

A. Trade confirmation

B. Marketing brochure

C. Investment policy statement

D. Custody receipt

Correct Answer: C. Investment policy statement

Question 4

If a pre-tax return is 6% and a simplified effective tax rate of 25% applies fully, what is the after-tax return?

A. 1.5%

B. 4.5%

C. 6.25%

D. 8.0%

Correct Answer: B. 4.5%

Question 5

Which activity is primarily a KYC or AML activity rather than a suitability activity?

A. Determining whether a product matches the client’s time horizon

B. Selecting a benchmark for the portfolio

C. Verifying beneficial ownership and identity

D. Setting a strategic equity allocation

Correct Answer: C. Verifying beneficial ownership and identity

Question 6

Why should an adviser analyse a client’s external business ownership when assessing portfolio risk?

A. It may represent concentrated and illiquid economic exposure.

B. External assets never affect risk capacity.

C. It automatically qualifies the client for leverage.

D. It replaces the need to assess liabilities.

Correct Answer: A. It may represent concentrated and illiquid economic exposure.

Question 7

Which item is most appropriately included in an investment mandate?

A. The client’s preferred news sources

B. Permitted instruments, leverage limits and reporting duties

C. A guaranteed annual return

D. An assurance that markets will not decline

Correct Answer: B. Permitted instruments, leverage limits and reporting duties

Question 8

What is risk perception?

A. The legal ownership of an investment account

B. The objective ability to withstand loss

C. The subjective interpretation of investment risk

D. The portfolio’s accounting return

Correct Answer: C. The subjective interpretation of investment risk

Question 9

A client’s overall investment horizon is twenty years, but a known tuition payment is due in three years. How should the adviser treat the payment?

A. Ignore it because the overall horizon is long.

B. Treat it as a goal-specific near-term liability.

C. Fund it entirely with leveraged equities.

D. Classify it as an aspirational goal automatically.

Correct Answer: B. Treat it as a goal-specific near-term liability.

Question 10

Which is an appropriate reason to review an IPS outside the regular review date?

A. A material change in the client’s income or liabilities

B. A manager wants to increase trading commissions

C. A security has had one profitable day

D. A client receives a generic advertisement

Correct Answer: A. A material change in the client’s income or liabilities