The KYC intake fields and what each screens for
| Field | Why it matters | Where it goes |
|---|---|---|
| Identity (legal name, ID, SSN / TIN, address, date of birth) | USA PATRIOT Act Customer Identification Program (CIP) requirement; OFAC sanctions screening | Account-opening paperwork and AML file |
| Investment objectives (growth, income, preservation, speculation) | Anchors the suitability analysis for every recommendation that follows | IPS return-objectives section (RR-LTLU mnemonic, R) |
| Risk tolerance (emotional -- what drawdown can they stomach) | Predicts behavior in a real selloff; clients overstate this until tested | IPS risk-tolerance section (RR-LTLU, R) |
| Risk capacity (financial -- what can they afford to lose) | Often diverges from tolerance; capacity is the harder constraint | IPS risk section + suitability calculation |
| Time horizon (when is the money needed) | Determines asset-allocation envelope and liquidity needs | IPS time-horizon section (RR-LTLU, T) |
| Liquidity needs (cash required in 0-3 years) | How much must stay in cash equivalents regardless of market view | IPS liquidity section (RR-LTLU, L) |
| Tax + legal constraints (tax bracket, trust structure, prohibited holdings) | Drives asset-location decisions and avoids prohibited investments | IPS constraints section (RR-LTLU, T) |
| Source of funds (inheritance, salary, business sale, sale of property) | AML / suspicious activity screen; also informs the emotional weight of the money | AML file + IPS unique-circumstances (RR-LTLU, U) |
| Other assets + held-away accounts | True asset allocation can only be computed against full picture, not the slice you manage | IPS unique-circumstances + total-wealth review |
Why honest answers matter more than the form
The hardest part of KYC is not collecting the fields; it is getting honest answers -- which is why a good adviser probes, and why you should let them. Most people overstate their risk tolerance before they have seen a real drawdown -- they imagine they can stomach a 40% loss because they have not lived through one. The standard probe is concrete and counterfactual: 'Your $500,000 portfolio falls to $300,000 over six months. The news says it could fall further. What do you do?' Someone who answers 'sell everything and wait for the bottom' has a risk tolerance well below what a paper questionnaire would have scored. A careful adviser builds your profile from your answers to questions like that, not from a five-point Likert scale -- so if your adviser only hands you a checkbox quiz and never asks the drawdown question, that is a signal about how seriously the profile is being built.
Suitability vs Reg BI: the standard your adviser meets
Suitability vs Reg BI -- the distinction matters and changes the bar your adviser is held to. FINRA Rule 2111 (suitability) asks whether a recommendation is APPROPRIATE for your profile. Reg BI (Regulation Best Interest, SEC 2020) raises the bar for broker-dealers: a recommendation must be in your BEST interest, not merely suitable. Investment advisers under the Investment Advisers Act have always been held to a fiduciary standard, which is a still-stricter version of best-interest. In practice: if two products are nearly identical and one is cheaper for you, suitability lets the adviser recommend either; Reg BI and fiduciary duty require the cheaper one when the only reason to choose the pricier one is what it pays the adviser. Know which standard applies to the person advising you -- ask them, in writing, whether they are a fiduciary -- because it changes which conversation you are entitled to.
Test whether a target-date fund fits a real investor
Reading risk tolerance against risk capacity
Why risk capacity can bind tighter than tolerance
Risk tolerance is what the client can stomach emotionally; risk capacity is what they can afford to lose without breaking the plan. They diverge often and predictably -- a client late in their career with a portfolio that must fund spending has high tolerance and LOW capacity. The disciplined portfolio uses the lower of the two as the binding constraint. The reason: a 30% drawdown in the first year of retirement forces selling assets at the bottom to meet spending, which permanently impairs the plan even if the market recovers. Tolerance can survive that; capacity cannot. 'Confirmed aggressive' walks into the sequence-of-returns trap. 'Defer to the client' confuses the advisor's job (translate stated wishes into a survivable plan) with the client's job (state wishes). Get the divergence on the record in the IPS so the client sees it before the drawdown, not after.
The three jobs a good KYC conversation does
Spotting concentration risk in a KYC profile
Four KYC mistakes to watch for
Going deeper (optional). Up next: the four KYC mistakes to watch for in an adviser (and to avoid if you manage your own money) — an advanced aside you can skip on first pass and come back to anytime. Continue when you're curious.
Going Deeper -- the four KYC mistakes to watch for in an adviser (and to avoid if you manage your own money). (1) Treating the KYC form as paperwork: the form IS the conversation; an adviser who rushes it is rushing the relationship. (2) Believing the self-reported risk tolerance: the paper questionnaire over-predicts how aggressive a person will actually behave; concrete drawdown counterfactuals correct this. (3) Stopping at tolerance and skipping capacity: tolerance alone misses retirees and pre-retirees whose capacity is the binding constraint. (4) Treating disclosure as a substitute for suitability: disclosure documents a conflict; it does not discharge the duty to recommend what is in your best interest. An AI prompt you can use to pressure-test your own profile: 'Given this KYC profile, identify the divergence between risk tolerance and risk capacity, and name the single biggest constraint an IPS must encode.' The next module turns from the profiling conversation to the regulatory backdrop AML imposes on every account that gets opened.
Sit with the ideas.
Imagine you walk into an adviser's office and say you want 'high returns with no risk' and want to put your entire $500,000 inheritance into a single high-conviction biotech idea you read about on a forum. You are 34, employed, and would not need the money for at least 20 years. Under FINRA Rule 2111 (suitability) and Reg BI, what is the disciplined first response you should expect from a good adviser?