Study guide
8.5 Suitability & Know Your Customer
Series 65 Uniform Investment Adviser Law
Track your progress as you read
Finished sections get a check mark.
1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
8.5 Suitability & Know Your Customer
Key Takeaways Explain This Topic AI
KYC gathers financial, personal, and investment profile information.
Fiduciary duty requires acting in the client's best interest on an ongoing basis.
Suitability is assessed at the time of recommendation.
Advisers must place client interests ahead of their own.
Document client information and recommendation rationale.
Red flags include mismatched risk, illiquidity needs, and excessive costs.
Last updated: December 2025
Suitability & Know Your Customer (KYC)
Investment advisers have a duty to understand their clients and make recommendations appropriate for each client's unique situation. This obligation goes beyond merely avoiding unsuitable recommendations—it requires acting in the client's best interest.
- Know Your Customer (KYC) Requirements
- Information Gathering Framework
Investment advisers should collect comprehensive information in three categories:
Financial Information
- Category Specific Data Points
- Income Current salary, bonus, other income sources, stability
- Net Worth Assets, liabilities, liquid vs. illiquid
- Tax Status Federal/state brackets, tax-advantaged account capacity
- Cash Flow Monthly surplus, large upcoming expenses
- Existing Investments Current holdings, cost basis, concentration
- Debt Mortgages, loans, credit cards, student loans
- Personal Information
- Category Specific Data Points
- Demographics Age, marital status, dependents
- Employment Status, stability, benefits, retirement plans
- Health General health, insurance coverage, special needs
- Education Investment knowledge, financial sophistication
- Life Events Upcoming retirement, marriage, children, inheritance
- Investment Profile
- Category Specific Data Points
- Objectives Growth, income, preservation, speculation
Time Horizon When will funds be needed?
- Risk Tolerance Psychological comfort with volatility
- Liquidity Needs Emergency fund, planned purchases
- Special Constraints Ethical restrictions, concentrated positions
- Investment Objectives
- Primary Objectives Spectrum
From most conservative to most aggressive:
- Objective Goal Typical Investor Risk Level
- Preservation Protect principal Retirees, short horizon Lowest
- Income Generate cash flow Retirees, income-dependent Low-Moderate
- Growth & Income Balanced appreciation + cash flow Mid-career professionals Moderate
- Growth Capital appreciation Long time horizon investors Moderate-High
- Speculation Maximum returns High risk tolerance, money can afford to lose Highest
- Balancing Competing Objectives
Most clients have multiple objectives that create trade-offs:
- Trade-Off Conservative Choice Aggressive Choice
- Safety vs. Return CDs, Treasuries Equities, alternatives
- Income vs. Growth Dividend stocks, bonds Growth stocks
- Liquidity vs. Yield Money markets CDs, bonds held to maturity
- Suitability vs. Fiduciary Standard
Understanding the distinction between these standards is critical for the Series 65.
Suitability Standard (Broker-Dealers)
The traditional FINRA Rule 2111 suitability standard has three components:
- 1. Reasonable-Basis Suitability
- The investment must be suitable for at least SOME investors
- Adviser must understand the product being recommended
- 2. Customer-Specific Suitability
- The investment must be suitable for THIS particular client
- Based on client's profile and circumstances
- 3. Quantitative Suitability
- The quantity of transactions must be suitable
- Prohibits excessive trading (churning)
- Fiduciary Standard (Investment Advisers)
Investment advisers are held to a HIGHER standard—fiduciary duty:
- Component Requirement
- Duty of Care Provide advice in client's best interest; seek best execution; provide advice and monitoring
- Duty of Loyalty Put client's interests ahead of your own; eliminate or fully disclose conflicts
- Full Disclosure Disclose all material facts and conflicts of interest
- Best Interest Recommend what's BEST for client, not just what's suitable
- Key Differences
- Aspect Suitability Standard Fiduciary Standard
- Timing At time of recommendation Ongoing relationship
- Level Must be suitable Must be in best interest
- Conflicts Must be disclosed Must be eliminated or disclosed
- Whose Interest Must be fair Must put client FIRST
- Applies To Broker-dealers Investment advisers
- Regulation Best Interest (Reg BI)
In 2020, the SEC implemented Regulation Best Interest, enhancing broker-dealer obligations.
Reg BI Four Obligations:
- Disclosure : Provide Form CRS; disclose material facts
- Care : Exercise reasonable diligence, care, and skill
- Conflict of Interest : Establish policies to identify and mitigate conflicts
- Compliance : Establish policies reasonably designed to achieve compliance
Note : Reg BI is HIGHER than old suitability but still NOT a full fiduciary standard.
- Red Flags and Warning Signs
- Suitability Red Flags
- Aggressive investments for conservative clients
- Illiquid investments for clients needing liquidity
- Complex products for unsophisticated investors
- High-cost products when lower-cost alternatives exist
- Concentrated positions without justification
- Excessive trading (churning)
- Recommendations inconsistent with stated objectives
- Documentation Best Practices
- Use standardized intake questionnaires
- Document client responses in writing
- Update profiles at least annually
- Note any changes in circumstances
- Record rationale for recommendations
- Keep records of client communications
- On the Exam
Series 65 frequently tests:
- The difference between suitability and fiduciary standards
- That fiduciary duty is ongoing, not just at time of recommendation
- KYC information categories (financial, personal, investment profile)
- Matching investment objectives to client characteristics
- Red flags indicating unsuitable recommendations
- Key Takeaways
- KYC requires gathering financial, personal, AND investment profile information
- Fiduciary standard requires acting in client's BEST interest, not just suitable
- Fiduciary duty is ONGOING; suitability applies at time of recommendation
- Investment advisers must put client interests AHEAD of their own
- Always document client information and recommendation rationale
- Red flags include mismatched risk levels, illiquidity for those needing liquidity, and excessive costs