4.3 The Purchase Process and Suitability Assessment Before Personal Advice
Key Takeaways
Before gathering an investor's information, a Consultant must explain its purpose, the effect of inaccurate information and the risk of putting all or most of the investor's funds into one scheme.
A reasonable basis for personal advice requires information on background, financial situation, investment objectives and needs, risk tolerance, and knowledge and investment experience.
If no scheme suits the investor, the Consultant must not recommend any scheme and must explain why.
For PRS, the personal advice requirements may be dispensed with when a member relies on the default option, switches within the same category, has contributions channelled by an employer or transfers to an existing account of another PRS Provider.
The Trustee supervises purchases and repurchases and reports to investors if the Scheme Provider's processes are inadequate.
The Purchase Process
The process starts when an investor becomes interested in a scheme and ends when the investor receives a statement showing the units bought. If the Consultant represents an IUTA or CUTA, the application normally passes through that institution before reaching the Scheme Provider.
| Party | Role in the purchase |
|---|---|
| Consultant | Usually starts the process; must act honestly, fairly and professionally and follow the Guidelines on Conduct for Capital Market Intermediaries; ensures forms are complete and legible |
| Scheme Provider | Coordinates everything: receives the form, reconciles online payments, banks cheques, informs the Trustee, updates records and issues the statement |
| Trustee | Supervises purchases and repurchases; ensures buying, selling, valuing and pricing follow the deed and rules; reports shortcomings to investors with corrective steps; acts as watchdog if errors or fraud appear |
| Bank | Maintains the scheme's bank accounts and, on the Trustee's instructions, receives funds and honours payments |
| Fund manager | Watches cash flows in and out; invests according to the objective, deed, offering document and guidelines |
A simple data-entry error can greatly inconvenience an investor, so quality at every step matters.
The Fund Manager Must Stick to the Mandate
If a fund promising high capital growth with minimal cash instead holds a lot of cash, investors miss a market rally and complain. The study guide suggests comparing target return and volatility with actual results:
| Example | Data | Conclusion |
|---|---|---|
| Fixed income fund aiming for mid-to-high single-digit returns with medium-to-low volatility | Returns 7.3%, 8.5%, 6.8%; volatility 4.2%, 5.1%, 4.8% | In line with its objective and mandate |
| PRS fund aiming to track the FBM KLCI | Index 8.9%, 3.1%, 12.3% vs fund 7.1%, −2.2%, 8.8% | Failed to track the index; not consistent with its objective |
Personal Advice and Suitability
The SC's Guidelines on Product Highlights Sheet require anyone marketing an unlisted capital market product to act honestly, fairly and professionally, and Consultants must comply with the Guidelines on Conduct for Capital Market Intermediaries when giving personal advice.
Step 1: Explain before gathering information
The Consultant must tell the investor:
- the information is collected so that the advice suits the investor's particular circumstances, so it is in the investor's interest to give current, accurate and complete information;
- inaccurate or incomplete information will affect the advice, and the Consultant will not be accountable for advice based on it; and
- the risk of investing all or a large part of the investor's available funds, including savings and retirement money, in one scheme.
Step 2: Form a reasonable basis
| Information to gather | Examples |
|---|---|
| Background | For customer due diligence, plus any indicators of vulnerability |
| Financial situation | Employment, income, commitments, assets and liabilities, dependants |
| Investment objectives and needs | Purpose, duration, capital protection, preferences such as sustainable and responsible investment (SRI) or Islamic investments |
| Risk tolerance | How much loss the investor is willing to bear |
| Knowledge and experience | Education, training, work and investment experience, current portfolio; must match the complexity of the scheme |
The Consultant must then make sure the information is current, accurate, complete and sufficient; review both the investor information and the scheme; and match the investor with a suitable scheme. A scheme is suitable if it is likely to meet the investor's objectives and needs, given the financial situation, risk tolerance, knowledge and experience.
Step 3: Take other beneficial steps and document
The Consultant must take any other step that is reasonably for the investor's benefit, and document the information gathered and the advice given.
When nothing is suitable
If the investor's situation, risk tolerance or knowledge means no scheme fits (including the one the investor asked about), the Consultant must not recommend any scheme and must explain why.
When the Requirements May Be Dispensed With
The study guide lists situations (in somewhat condensed form) where these personal-advice steps need not be repeated in full:
- the investor is a sophisticated investor such as a high-net-worth entity who has opted out in writing;
- the investor is topping up an existing scheme with the same UTMC or PRS Provider, where the requirements were previously met; or
- the Consultant previously met the requirements and recommended a range of schemes, and the investor now invests within that range.
Where reliance on earlier information is allowed, the investor must confirm at the time of the transaction that there are no material changes.
For PRS, the requirements may also be dispensed with when:
- a member makes no fund selection, so the default option applies;
- a member switches to a selection within the same category;
- an employer channels contributions for employees; or
- a member transfers accrued benefits to an existing PRS account with another PRS Provider.
Applying It
Encik Tan, 62, retired, wants to put his entire EPF withdrawal of RM400,000 into a single emerging-market equity fund he saw advertised. Following the guidelines, the Consultant explains the concentration risk of putting a large part of his retirement money into one scheme, gathers his information (no other income, low tolerance for losses, limited investment experience), and concludes the fund does not suit him. The Consultant must not recommend it, must explain why, and may instead discuss lower-risk options that fit his needs, documenting everything.
Before collecting an investor's information for personal advice, what must the Consultant explain?
The Consultant's commission rate, the Distributor's sales targets and the bonus earned if the investor buys today
That the information will be shared with other Distributors and Consultants so the investor can compare competing product offers
That advice is available only to investors with at least RM10,000 and that the SC pre-approves every recommendation
Why the information is needed, the effect of inaccurate information and the risk of concentrating funds in one scheme
After a full assessment, a Consultant finds that no scheme suits the investor. What must the Consultant do?
Refer the investor to FIMM for a decision
Let the investor choose any fund and record it as unsolicited
Not recommend any scheme and explain to the investor why no scheme is suitable
Recommend the lowest-risk fund available anyway
In which PRS situation may the personal advice requirements be dispensed with?
When an employer channels contributions for its employees
When a member wants to invest in a non-core equity fund for the first time
When the member has a high income
When a member is over 55
Sections you finish are checked off in the contents.