Risk Tolerance Questionnaire

C is correct. The risk tolerance questionnaire revealed Elena has LOW capacity (near-term income needs, limited experience) and LOW willingness (anxiety about volatility). Small-cap growth stocks are highly unsuitable: they offer no income, have high volatility, and require long time horizons (5-10+ years). The adviser MUST explain why her request violates customer-specific suitability and recommend appropriate conservative, income-generating investments (investment-grade bonds, dividend-paying stocks). This fulfills the adviser's obligation under FINRA Rule 2111.

A is incorrect because client autonomy does not override suitability obligations. While clients ultimately control their accounts, advisers cannot make or implement unsuitable recommendations, even at client request. The adviser must educate and recommend suitable alternatives. B is incorrect because clients CANNOT waive suitability requirements. No disclosure or waiver absolves the adviser from suitability violations. Making unsuitable recommendations remains prohibited regardless of client acknowledgment. D is incorrect because a 50/50 "compromise" is still unsuitable. Elena's near-term income needs (1 year) and anxiety about volatility mean even 50% in small-cap growth stocks creates inappropriate risk. Suitability is not negotiable - recommendations must align with questionnaire results.

B is correct. The risk tolerance questionnaire serves two critical regulatory purposes: (1) It fulfills Know Your Customer (KYC) obligations under FINRA Rule 2090, which requires firms to use reasonable diligence to know essential facts about every customer, and (2) It establishes the factual foundation for customer-specific suitability determinations under FINRA Rule 2111. The questionnaire objectively assesses the client's financial situation, investment objectives, risk tolerance, time horizon, liquidity needs, tax status, and investment experience - the seven required factors for suitability analysis. Without this information, advisers cannot make suitable recommendations.

A is incorrect because the questionnaire's purpose is regulatory compliance (KYC and suitability), not marketing. While firms may use client information for business purposes, that's not the regulatory purpose of the risk tolerance assessment. C is incorrect because the questionnaire is not primarily a liability shield. While proper documentation helps demonstrate compliance, using it merely for legal protection misses its true purpose: gathering essential client information to make appropriate recommendations. The focus is prospective (making suitable recommendations), not retrospective (defending past actions). D is incorrect because risk tolerance questionnaires fulfill federal SRO requirements (FINRA Rules 2090 and 2111), not state registration requirements. State securities laws may have similar KYC requirements, but the primary regulatory driver is FINRA rules applicable to broker-dealers.

C is correct. Thomas's questionnaire results indicate HIGH risk tolerance based on both capacity and willingness. Risk CAPACITY is high: 25-year time horizon (very long), stable high income ($180,000), substantial net worth ($400,000), and no near-term liquidity needs all indicate strong financial ability to weather volatility. Risk WILLINGNESS is high: demonstrated behavior during actual market downturns (stayed invested in 2020 and 2022) is the gold standard for assessing psychological comfort - actions speak louder than words. An 80/20 allocation (moderately aggressive) appropriately matches this high risk tolerance while maintaining some diversification for risk management. This aligns with his long-term growth objective.

A (30/70) is far too conservative given his high capacity, high willingness, and 25-year time horizon. This conservative allocation would likely produce insufficient growth to meet long-term objectives and wastes his ability to take appropriate risk for higher returns. B (60/40) is moderate but still too conservative. While not wrong per se, it underutilizes Thomas's clear capacity and demonstrated willingness for equity risk. Given his profile, a more aggressive allocation is appropriate. D (100/0) is too aggressive despite high risk tolerance. Even aggressive investors benefit from some fixed income for diversification, rebalancing opportunities, and dampening extreme volatility. The "moderately aggressive" allocation in C provides optimal balance: heavily weighted to equities for growth while maintaining risk management through diversification.

D is correct (the EXCEPT answer). Political party affiliation and voting history are NOT relevant factors for risk tolerance assessment and are not included in standard questionnaires. While some clients may have values-based investment preferences (ESG, socially responsible investing), political affiliation itself does not determine financial capacity or psychological willingness to take investment risk. Including such questions could raise privacy concerns and has no bearing on suitability analysis.

A is a critical factor that IS assessed: Time horizon directly affects risk CAPACITY. Longer time horizons (20+ years) increase ability to take risk because portfolios have time to recover from downturns. Shorter time horizons (under 5 years) reduce capacity because near-term volatility could force selling at losses. This is essential for determining appropriate equity exposure. B is a critical factor that IS assessed: Income, net worth, and liquidity needs determine financial CAPACITY. High income and net worth with minimal liquidity needs indicate ability to withstand temporary losses. Low income/net worth or significant near-term liquidity needs reduce capacity regardless of psychological comfort. C is a critical factor that IS assessed: Emotional responses and past behavior reveal psychological WILLINGNESS. How clients actually behaved during real market stress (2020 COVID crash, 2022 bear market) is the most reliable indicator of true risk tolerance. Self-reported comfort is less reliable than demonstrated actions.

B is correct. Statements 1, 2, and 3 all represent material changes requiring an updated risk tolerance questionnaire.

Statement 1 (retirement with income needs) is TRUE: This represents material changes in multiple factors: time horizon (now shortened for portfolio lifespan), liquidity needs (new monthly withdrawal requirements), and potentially income (shift from accumulation to distribution phase). These changes significantly affect risk CAPACITY. The client can no longer tolerate the same level of volatility when they need reliable monthly income. An updated questionnaire is required to reassess appropriate risk level and adjust asset allocation accordingly.

Statement 2 (inheritance doubling net worth) is TRUE: A $2 million inheritance materially increases financial resources and risk CAPACITY. The client can now absorb larger potential losses without threatening financial security. However, increased capacity doesn't automatically mean increased willingness, so an updated questionnaire should assess whether risk tolerance should change. This represents a significant change in financial situation, one of the seven suitability factors.

Statement 3 (divorce reducing net worth 50%) is TRUE: Losing half of net worth through divorce materially reduces risk CAPACITY. The client has less financial cushion to absorb losses and may have new expenses (separate household, child support, legal fees). Time horizon might also change if retirement plans are affected. An updated questionnaire is essential to adjust recommendations to the new, more constrained financial situation.

Statement 4 (interest in cryptocurrency) is FALSE: Expressing interest in a specific investment type does not constitute a material change in circumstances requiring a new questionnaire. This is a product inquiry, not a change in financial situation, time horizon, income, net worth, or other fundamental factors. The adviser should evaluate whether cryptocurrency aligns with the EXISTING risk tolerance assessment. If it doesn't (cryptocurrencies are highly speculative), the adviser should explain the unsuitability rather than updating the questionnaire. Interest ≠ material circumstance change.