Why does "suitable" depend on the person, not the product?
Educational content, not legal or compliance advice. Know-your-client obligations, documentation standards and client categorisation rules are set by your regulator and differ by jurisdiction and service type.
There is no such thing as a suitable product. Suitability is a statement about a match — between an instrument and a specific person's circumstances — and it therefore cannot be printed on a brochure. The same instrument can be prudent for one client and reckless for the next, with nothing about the instrument having changed.
What "knowing the client" actually covers
Not just a risk questionnaire. A usable client picture includes:
- Objectives — what this money is actually for, in words the client would use.
- Time horizon — when it will be needed, and whether that date is firm.
- Risk capacity — the ability to absorb loss. A balance-sheet fact: income, reserves, dependants, other assets.
- Risk tolerance — the willingness to absorb loss. A psychological fact, and a less stable one.
- Liquidity needs — what must be reachable, and how quickly.
- Existing holdings — especially concentration. A perfectly reasonable position becomes unsuitable when it is the client's fourth exposure to the same thing.
- Knowledge and experience — can they understand what they are being asked to own?
- Tax and legal position, and any constraints: mandates, ethical or religious restrictions, employer trading restrictions.
When capacity and tolerance disagree, capacity generally wins. A client with an enthusiastic appetite for risk and no reserves cannot be given the portfolio they want; willingness does not pay bills. The conversation that explains this is part of the job, not a preliminary to it.
One product, two clients
A five-year structured note pays 7% a year and returns capital in full unless the underlying index falls more than 40%, in which case capital is exposed. It cannot be sold before maturity without a significant penalty.
Client A — 62, retired, €400,000 in total assets, needs €20,000 a year to live on and has no other income. A €100,000 allocation is 25% of everything, locked for five years, with capital at risk.
- Liquidity: fails. The €7,000 coupon covers about a third of the annual draw, so €13,000 a year still has to come from a pool that is now €100,000 smaller and cannot be topped up from the note until maturity. A coupon is income; it is not access to the principal.
- Capacity: fails. There is no income stream to rebuild a loss and no time to wait one out.
- Suitable? No — and note that the note has done nothing wrong.
Client B — 38, €1.2m liquid, salary comfortably covers spending, allocating €60,000 (5%), and can explain the barrier back to you accurately.
- Liquidity: fine. Nothing depends on this money for five years.
- Capacity: fine. A total loss on 5% is survivable.
- Understanding: demonstrated, not assumed.
- Plausibly suitable — with the concentration and understanding both documented.
Same coupon, same barrier, same issuer. Suitability lived entirely in the client file.
The duty keeps running
A client picture is a snapshot with a short shelf life. Redundancy, divorce, a new child, an inheritance, a diagnosis, a shortened horizon — each of these can turn a suitable holding unsuitable without any market movement at all. Regimes generally expect periodic review and re-assessment after material changes; the professional habit is to ask, at every review, "what has changed about you?" before discussing what has changed about the portfolio.
Try it now
- Write your own client file in six lines: objective, horizon, capacity, tolerance, liquidity needs, constraints. Most people have never written this down, and the writing is where the surprises are.
- Find one holding that fits your tolerance but not your capacity. If capacity wins, what would you have to change?
- Check what fraction of your portfolio sits in a single sector: look up each holding's sector, and summing the weights that share one is the whole calculation. Concentration is a suitability fact that most questionnaires never ask about. Apple's classification is below; for each of your own holdings, open it in the Terminal (the link starts on Apple; change the symbol) and read the sector there.