Suitability
Whether an investment fits a particular investor's objectives, constraints and experience. Under Standard III(C) it is judged against the whole portfolio, or against the stated mandate where a manager runs one.
Where you will meet it
Suitability appears in 10 learning outcomes on the CFA syllabus. A few of them:
- Use Standard III (Duties to Clients) to judge a case
“Suitability requires an investment to be judged in the context of the client's whole portfolio and written objectives, so a sound investment can still be an unsuitable one.”
- Explain credit ratings, notching and where ratings fall short
“Ratings are opinions about relative default risk, not about price or suitability; they lag market spreads, are slow to change, and say nothing about liquidity or about the risk of a spread widening short of default.”
- Explain what the Code and Standards expect of members ethically, covering every standard and its subsections
“Duties to Clients cover loyalty, fair dealing, suitability, performance presentation and confidentiality, and Duties to Employers cover loyalty, additional compensation and supervision.”
- Explain and assess the regulatory and compliance requirements that shape how private wealth firms operate
“Rules differ by jurisdiction, but the recurring themes are licensing and registration, the standard of care owed to clients (a fiduciary or best-interest duty versus a lighter suitability test), know-your-client and anti-money-laundering checks, disclosure of fees and conflicts, marketing and cross-border rules, and data protection.”
See also
Practise it
Practise suitability until it is automatic: questions that explain every wrong option.
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