Glossary term
Suitability
Subject: Compliance and Regulation, Conduct and Consumer Protection
Also known as: Suitability Assessment
Suitability is the test that a financial product or recommendation fits the particular customer's objectives, financial situation, knowledge and capacity to bear loss, judged before the sale is made.
Explanation
An adviser collects information about the customer: goals, time horizon, income and assets, experience with products, and attitude to risk and loss. The adviser then recommends only products that match, records the reasoning and gives the customer a written statement of why. Regimes differ in scope. In the EU, MiFID II requires a suitability test when advice is given, and a lighter appropriateness test for some non-advised sales of complex products, which only checks whether the customer understands the risks. Insurance, pensions and lending carry similar duties. Common failings include copied risk profiles, ignoring a customer's stated aims and recommending whatever pays the highest commission. Reviewers testing a sample of advised sales look for the file note that links the customer's profile to the product chosen.
Example
A 62-year-old customer planning to retire in three years asks a bank adviser about investing his savings. His questionnaire shows low risk tolerance and no investment experience. The adviser recommends a mix of bonds and a balanced fund, not the equity fund promoted that quarter, and records why in the file. A quality check later confirms the advice matched the customer's profile.
Not to be confused with
- Know Your Customer (KYC)
- KYC identifies the customer to prevent financial crime; suitability learns the customer's needs to decide whether a product fits.