The Importance of Fact Finding
FINRA Rule 2090 (Know Your Customer) requires firms to “use reasonable diligence, in regard to opening and maintenance of every account, to know (and retain) the essential facts concerning every customer...” The rule explains that essential facts are “those required to (a) effectively service the customer’s account, (b) act in accordance with any special handling instruction for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) compliance with applicable laws, regulations and rules.”
FINRA Rule 2111 (Suitability) requires that a firm or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”
The essential requirement of this provision is that the member firm or associated person exercise “reasonable diligence” to ascertain the customer’s investment profile. In most instances, asking a customer for the information would constitute reasonable diligence. When customer information is unavailable despite a firm’s reasonable diligence, however, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of the recommendation.
To meet its suitability obligations, we, as a firm, must obtain and analyze enough customer information to have a reasonable basis to believe the recommendation is suitable. As such, it is required that fact-finding be completed for every client. Every sale of any product must be supported with evidence kept in the client file of a properly completed fact-finding interview with the customer. The evidence must be sufficient to substantiate all recommendations made to the client. An analysis based on the information contained in the Fact Finder should be maintained in the client file.
Encourage the client to sign and date the completed Fact Finder. This will help ensure that the information obtained from the customer is accurate.
CFS requires that a current Fact Finder and / or Echowealth Output be submitted with new business applications or available under the client’s record in Smart Office.
Fact Finder Decline Forms are not allowed. Any application submitted with a Fact Finder Decline form will be pended or rejected.
Client Discovery (E-Fact Finder)
Signator Investors, Inc. offers an electronic Fact Finder called Client Discovery. For more information on this, visit this link via Junction:
Analyze the facts you have uncovered BEFORE making a recommendation
It is imperative that advisors conduct a complete and thorough analysis of all information (quantitative and qualitative) gathered prior to making any product, service or action-oriented recommendations. It is very important that advisors gather appropriate and sufficient information that will substantiate your recommendations.
Advisor recommendations must be consistent with the facts you have uncovered.
Fact-finding obligation when dealing with other financial professionals on behalf of a customer
In the event that a financial professional (accountant, attorney or other financial Advisor) is involved in advising a customer regarding his or her financial needs or required product attributes, written documentation of such financial advice or recommendations to a customer by the financial professional must be included in the advisor’s file and considered in the advisor’s analysis. Such documentation should be in the form of written instructions from the financial professional to the advisor regarding the customer.
If the information provided by the financial professional does not provide adequate fact-finding information, the advisor is required to obtain adequate information by which s/he may reasonably recommend the purchase or sale of a product to a customer.
Retain a copy of the Fact Finder and analysis in your client files
The advisor must retain in your Client Files and upload to the client’s record in Smart Office a copy of the completed Fact Finder or documentation from the client’s financial professional and any analysis of the client’s needs.
Same Fact Finder may be used for multiple recommendations
The same Fact Finder may be used for multiple recommendations made to the same client. However, each time a recommendation is made, the advisor must ascertain whether the information on the existing Fact Finder is sufficiently detailed and current to ensure that the recommendation is suitable.
At a minimum, a Fact Finder should be updated with a client every year prior to new recommendations.
Updating an Existing Fact Finder
It is a best practice to complete a new Fact Finder each year with the client. At a minimum, the existing Fact Finder can be updated with new information with a client initial and date.
Choosing a Fact Finder
Standard, approved Fact Finders are available for your use. NonstandardFact Finders can be used only after SMAR approval.
Your Sales Manager can provide help with client language or scripts to be used with Fact Finders.