You are collecting know your client (KYC) information for your new client, Yael. She has recently accepted an early retirement package from her…

This is a suitability issue. Although Yael states she is comfortable with high risk, her financial situation dictates her risk capacity. She needs the investment income to pay for essential monthly expenses, meaning capital preservation and a reliable income stream are paramount. A mortgage fund is designed to provide regular income and carries a moderate level of risk, aligning with her primary objective and financial need. Equity funds are too volatile for an investor who depends on the income for living expenses. A money market fund is safe but the income may be too low.

A. A global equity fund is a high-risk growth investment and does not provide the stable income required to pay monthly bills.
B. A money market fund is very low risk but the income generated would likely be insufficient to meet her significant monthly expenses.
D. A Canadian equity index fund is a high-risk investment focused on capital growth, making it unsuitable for generating necessary, stable income.

1. He, Y., & Li, Y. (2015). The "Know-Your-Client" Rule and the Suitability of Financial Advice. Journal of Financial and Quantitative Analysis, 50(3), 535-560. https://doi.org/10.1017/S002210901500023X. This paper discusses the regulatory importance of assessing a client's financial situation, objectives, and risk capacity over their stated risk tolerance.

2. McGill University, Desautels Faculty of Management. (n.d.). FINE 441: Investment Management Course Syllabus. Course topics include portfolio management for individual investors, emphasizing the need to align investment strategy with the client's objectives and constraints, such as income needs.