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Rule 16 – Suitability of investment strategies given client’s risk tolerance.

Posted by David Gobeil on

When the December 2017 CFP examination was scored, ethical issues were flagged in certain candidate responses.

Rule 16 – Suitability of investment strategies given client’s risk tolerance The CFP professional must only make recommendations that are prudent and suitable for the client (Rule 16 of the FPSC Rules of Conduct).

When recommending an investment strategy, the CFP professional must consider all the client’s suitability factors, not just the rate of return required to achieve an objective, or the client’s age or time horizon. In particular, the CFP professional should ensure that any investment recommendations are suitable given the client’s risk tolerance and objectives.

For example, a CFP professional should not recommend that a client move from a conservative portfolio to riskier investments to achieve a higher rate of return (and thus have a better chance of achieving retirement income objectives) without first confirming that the change in asset allocation suits their risk tolerance. It is inappropriate to assume that a client can afford to take more risk, simply by looking at some of their other investment holdings, or the number of years remaining until retirement. It is also inappropriate to encourage or insist that a client amend their risk tolerance to allow them to adopt a riskier asset allocation.

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