CIFC practice question 14 of 30

Your client, Cosmo, recently inherited $50,000 from his uncle. He wants to use this money towards his retirement savings. Cosmo is a 50-year old…

Your client, Cosmo, recently inherited $50,000 from his uncle. He wants to use this money towards his retirement savings. Cosmo is a 50-year old, self-employed carpenter and he earns on average $65,000 per year. He has a registered retirement savings plan (RRSP) with the bank worth $425,000 and a tax- free savings account (TFSA) worth $46,000. He started saving when he was 25 years old and has always made his own investment decisions. His money is mostly invested in balanced funds. He feels most comfortable with these types of mutual funds since they offer potential investment growth but without being too aggressive. Cosmo has no other assets. What additional information do you need about Cosmo to fulfill your know your client obligation?

Answer options

A: time horizon

B: income and net worth

C: risk tolerance Correct answer

D: investment objectives

Correct Answer:

C. risk tolerance

Explanation

The Know Your Client (KYC) obligation requires collecting all relevant information to ensure investment recommendations are suitable. The scenario provides details on Cosmo's age, income, net worth, investment knowledge, time horizon (implied by age and retirement goal), and investment objectives (retirement savings). However, his risk tolerance is only described subjectively ("feels most comfortable," "not too aggressive"). A formal assessment of his capacity and willingness to assume risk is a critical and distinct component of the KYC process that is missing. This information is essential to determine the suitability of any investment recommendation.

Why Incorrect

A. time horizon: This is reasonably established; he is 50 and saving for retirement, implying a medium-to-long-term horizon.
B. income and net worth: This information is explicitly provided in the scenario (income of $65,000 and net worth of approximately $471,000).
D. investment objectives: His primary objective is clearly stated as "retirement savings."

References

1. IFSE Institute, Canadian Investment Funds Course (CIFC), Part 2, Module 9, Section 1, "Know Your Client and Suitability". This section lists the seven key pieces of information for KYC, with risk tolerance being a mandatory and separate element from investment objectives or time horizon.

2. Mutual Fund Dealers Association of Canada (MFDA), Policy No. 2 - Minimum Standards for Account Supervision. This policy outlines the KYC requirements for members, emphasizing the need to determine a client's risk tolerance to fulfill the suitability obligation.

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