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. Investment Advisor

    As defined by the Investment Advisors Act of 1940, any person ...
  2. Client Base

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

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

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

    An individual or business that purchases the goods or services ...
  6. Registered Investment Advisor - ...

    An advisor or firm engaged in the investment advisory business ...
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

    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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Financial Advisor

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
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 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 >>
  3. 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 >>
  4. 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 >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center