How does the suitability standard work when a client insists on an unsuitable investment?

Standard III(C) — Suitability requires that members make a reasonable inquiry into a client's investment experience, risk and return objectives, and financial constraints before making recommendations or taking action.

The Core Framework: Before any recommendation, you must understand the client's:

• Investment objectives (income, growth, capital preservation)
• Risk tolerance (ability AND willingness to take risk)
• Time horizon
• Tax situation
• Liquidity needs
• Legal and regulatory constraints
• Unique circumstances

When the Client Insists on Unsuitable Investments: This is where it gets nuanced. The standard does NOT say you must blindly follow client instructions. Here's the proper protocol:

1. Educate — Clearly explain why the proposed allocation is inconsistent with their stated objectives and constraints. Document this conversation.
2. Document the risk — If the client still insists, obtain written acknowledgment that they understand the risks and that the allocation deviates from your professional recommendation.
3. Reassess the IPS — Perhaps the client's actual risk tolerance differs from what was initially documented. Update the Investment Policy Statement to reflect their true preferences.
4. Consider refusing — In extreme cases, if executing the trade would violate your professional judgment and fiduciary duty, you may refuse and even terminate the relationship.

The Retired Client and Crypto Example: Mrs. Dalton is 72, retired, living on a fixed pension, and asks her advisor at Greenhill Wealth to put 80% in cryptocurrency. The advisor should:

1. Explain that an 80% crypto allocation is inconsistent with her income needs, low risk capacity, and short time horizon
2. Present alternative allocations that incorporate a small crypto position (say 5%) if she wants exposure
3. If she insists on 80%, get written documentation and update the IPS
4. If the advisor believes this would constitute financial harm, they should consider refusing

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Managed Accounts vs. Advisory:

• In a discretionary (managed) account, the portfolio manager has more responsibility to maintain suitability because they make the actual decisions.
• In an advisory account, the client makes final decisions, but the advisor still must provide suitable advice and document disagreements.

Exam tip: The CFA exam frequently tests the difference between risk tolerance (willingness) and risk capacity (ability). A client who wants high risk but cannot afford high risk has a conflict that must be resolved — typically by defaulting to the lower of the two.

For more Ethics case studies, explore AcadiFi's CFA Level I practice questions.