The suitability questionnaire: why your bank asks so many questions
Before recommending an investment, a firm must know its client. What the questionnaire is for and why it pays to answer honestly.
An obligation that protects the client
Anyone who approaches a bank or an adviser to invest is handed a questionnaire, sometimes a long one. It is not bureaucracy for its own sake: investment services rules in the European Union, the United Kingdom and many other countries require firms to gather information about the client before giving advice or managing a portfolio, so that they recommend only what suits that person.
This assessment is called suitability. If the information is missing, the firm cannot provide those services.
The three areas of questions
The first area is knowledge and experience: which instruments you know, which transactions you have already carried out, what your education or profession is. It helps establish whether you are able to understand the risks of what is being proposed.
The second is your financial situation: income, assets, commitments and debts. It helps establish how much loss you would materially be able to bear without consequences for your standard of living.
The third is your objectives: how long you intend to keep the money invested, what it is for, what level of fluctuation you are willing to accept, and any sustainability preferences.
Why answer honestly
The temptation is twofold: to claim more expertise than you have, so as not to look foolish, or more appetite for risk, to gain access to products with a higher expected return. In both cases the result is a profile that does not match the person, and recommendations that do not suit them.
The profile that emerges from the questionnaire is the basis on which the firm answers for its conduct. An inflated profile weakens the very protection the questionnaire exists for. The reverse also applies: if the person across the desk suggests the "right" answers so that a product fits, that is a sign to take note of.
A profile is not for ever
The profile should be updated when your situation changes: a new job, the birth of a child, buying a home, approaching retirement. Firms are required to review it periodically, but it is in your interest to report significant changes.
Understanding your own profile is also useful if you decide alone. The same three questions, what do I know, how much can I afford to lose, for how long and for what purpose, are the ones to ask before every choice.
Educational and informational content only. It is not personalised financial, investment or tax advice. All investments involve risks, including the possible loss of invested capital.
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