Know Your Client - KYC

What is 'Know Your Client - KYC'

The Know Your Client form is a standard form in the investment industry that ensures investment advisors know detailed information about their clients' risk tolerance, investment knowledge and financial position.

KYC forms protect both clients and investment advisors. Clients are protected by having their investment advisor know what investments best suit their personal situations. Investment advisors are protected by knowing what they can and cannot include in their client's portfolio.

BREAKING DOWN 'Know Your Client - KYC'

The Know Your Client (KYC) rule is an ethical requirement for those in the securities industry who are dealing with customers during the opening and maintaining of accounts. There are two rules which were implemented in July 2012 that cover this topic together: Financial Industry Regulatory Authority (FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability). These rules are in place to protect both the broker-dealer and the customer and so that brokers and firms deal fairly with clients.

The Know Your Customer Rule 2090 essentially states that every broker-dealer should use reasonable effort when opening and maintaining client accounts. It is a requirement to know and keep records on the essential facts of each customer as well as identify each person who has authority to act on the customer’s behalf.

The KYC rule is important at the beginning of a customer-broker relationship to establish the essential facts of each customer before any recommendations are made. The essential facts are those required to effectively service the customer’s account and to be aware of any special handling instructions for the account. In addition, the broker-dealer needs to be familiar with each person who has authority to act on behalf of the customer, and the broker-dealer needs to comply with all the laws, regulations and rules of the securities industry.

Suitability Rule

As found in the FINRA Rules of Fair Practices, Rule 2111 goes in tandem with the KYC rule and covers the topic of making recommendations. The suitability Rule 2111 notes that a broker-dealer must have reasonable grounds when making a recommendation that it is suitable for a customer based on the client’s financial situation and needs. This responsibility means that the broker-dealer has done a complete review of the current facts and profile of the customer including the customer’s other securities before making any purchase, sale or exchange of a security.

Establishing a Customer Profile

Investment advisors and firms are responsible for knowing each customer's financial situation by exploring and gathering the client's age, other investments, tax status, financial needs, investment experience, investment time horizon, liquidity needs and risk tolerance. The SEC requires that a new customer provide detailed financial information that includes name, date of birth, address, employment status, annual income, net worth, investment objectives and identification numbers before opening an account.

RELATED TERMS
  1. Client Base

    A company's primary source of business. A client base consists ...
  2. Broker-Dealer

    A person or firm in the business of buying and selling securities, ...
  3. Fiduciary Rule

    Fiduciary rule is regulation that requires retirement advisors ...
  4. Customer

    An individual or business that purchases the goods or services ...
  5. Advisor Account

    A type of investment account where an investment advisor works ...
  6. Principal Orders

    A type of order carried out by a broker-dealer which involves ...
Related Articles
  1. Financial Advisor

    Investing Other People's Money: 5 Things You Must Know

    Learn the five things an advisor should know before investing another person's money, with a focus on the FINRA "know your customer" rule.
  2. Financial Advisor

    Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards

    Discover the differences between the Suitability and Fiduciary Standards when hiring a financial advisor.
  3. Financial Advisor

    What are the Different Types of Financial Advisors?

    There are two primary types of financial advisors: investment advisors and investment brokers, who work for broker-dealers.
  4. Financial Advisor

    Top Tips for Inheriting a Book of Clients

    Inheriting another advisor's book of clients can be a big boon. Here are some tips on how to handle the transition.
  5. Personal Finance

    6 Questions to Ask a Financial Advisor

    Here are 6 questions you should ask to get to know a financial advisor before entrusting them with your financial well-being.
  6. Financial Advisor

    Advisors Need to Talk Less, Ask and Listen More

    Financial advisors spend a lot of time giving their clients advice on how to invest their money. But what they often forget to do is listen.
  7. Financial Advisor

    How Advisors Can Win with the New Fiduciary Rule

    Advisors would be wise to use the change in fiduciary rules to educate clients on the value of the advice they provide. Here are some tips.
  8. Financial Advisor

    How Advisors Can Keep Clients for Life

    Attracting good clients is only half the battle. Here's how financial advisors can keep them for life.
  9. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  10. Financial Advisor

    Advisors: Revisit Your Client's Risk Assumptions

    Financial advisors should avoid generalizing a client’s risk tolerance based on their age or other demographics.
RELATED FAQS
  1. Do financial advisors need to be approved by FINRA?

    Learn about whether a financial advisor may be required to be approved by FINRA, and what exams a financial advisor needs ... Read Answer >>
  2. What is required to establish a fiduciary relationship between a financial advisor ...

  3. What are the SEC (Securities And Exchange Commission) rules about OTC (over-the-counter) ...

    Find out how the Securities and Exchange Commission and the Financial Industry Regulatory Authority regulate trades on the ... Read Answer >>
  4. How does a customer base dictate goodwill?

    Find out how a customer base dictates the value of the goodwill by providing a ready market for its products and spreading ... Read Answer >>
  5. Is good customer service something to look for in a company in which I am considering ...

    Learn about the importance of customer service when deciding whether to invest in a stock. Good customer service can ensure ... Read Answer >>
  6. Why does my IRA keep losing money?

    I have a Roth IRA and it keeps losing money. The investment firm never calls to let me know what's happening. It's already ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center