Faruq is a Dealing Representative with Smart Planning Group, a mutual fund dealer. Faruq meets with his new client, Taline, and learns that she lives…

When assessing a client's risk profile, a representative must consider both risk tolerance (willingness to take risk) and risk capacity (ability to withstand financial loss). A conflict exists when tolerance is high but capacity is low. In this situation, the client's risk capacity is the overriding factor. Since Taline lives on a low, fixed income and cannot afford large losses, her risk capacity is low. Therefore, her overall risk profile must be assessed as "low," and any investment recommendations must be suitable for this profile, regardless of her desire for high returns.

A. This is incorrect because it ignores her low risk capacity, which is the more critical factor for suitability and client protection.

B. A representative must not recommend unsuitable, high-risk products to meet unrealistic expectations; they must adhere to the client's actual risk profile.

C. The risk profile should be based on the lower of risk tolerance and risk capacity to ensure the client is protected from unaffordable losses.

1. Canadian Securities Institute. (2022). Investment Funds in Canada Course, Volume 1, Chapter 2: Getting to Know the Client, pp. 2-14 to 2-15.

2. Mutual Fund Dealers Association of Canada (MFDA). (2021). MFDA Policy No. 2: Minimum Standards for Account Supervision. Section 2.2.1: The Know-Your-Client Rule.