CFA Level II Exam · Guidance for Standard III: Duties to Clients

Standard III(C) Suitability for CFA Level II

Updated 7 October 2026 · Fact-checked

Standard III(C) requires you to make a reasonable inquiry into a client's investment experience, risk and return objectives, and constraints before advising or acting. You judge each recommendation against the client's policy statement and the whole portfolio, not the security alone, and you update that information regularly.

Understand Suitability (Standard III(C))

Standard III(C) is about fit. A good investment for one client can be a bad one for another. The Standard asks you to know the client first, then recommend or act.

The Standard has two main duties. First, make a reasonable inquiry into the client's or prospect's investment experience, risk and return objectives, and financial constraints before making a recommendation or taking investment action. Then reassess and update this information regularly, and use it in the investment process. Second, determine that an investment is suitable to the client's financial situation and consistent with the client's written objectives, mandates and constraints before recommending or taking action. Judge suitability in a portfolio context.

The usual tool is the investment policy statement (IPS). It records objectives (risk and return) and constraints (liquidity, time horizon, taxes, legal and regulatory factors, unique circumstances). Once agreed, it is your reference point. If a client wants something outside it, you discuss it and update the IPS rather than quietly ignoring it.

Portfolio context matters. A high-risk asset may be acceptable as a small part of a diversified portfolio, because what counts is its effect on total portfolio risk and return. The reverse also holds: a safe-looking holding can be unsuitable if it concentrates the portfolio in one risk.

The Standard also applies to managers of pooled funds. Here the duty is to follow the stated mandate of the fund, such as its objectives and style, rather than the needs of each individual investor. If a manager wants to move outside the mandate, this must be disclosed and handled properly.

Key formulas to remember

Duty 1: Know the client: Reasonable inquiry (experience, risk and return objectives, constraints) → before advice or action → reassess and update regularly; Update at least periodically and after a material event, such as a change in circumstances or market conditions.
Duty 2: Test suitability: Investment suitable = fits client's financial situation AND consistent with written objectives, mandates and constraints; Both parts must hold. Use the IPS as the benchmark.
Portfolio context: Judge the investment by its effect on the whole portfolio, not in isolation; A risky asset may be suitable as a small, diversifying part of a portfolio.
IPS contents: Objectives: risk and return. Constraints: liquidity, time horizon, tax, legal and regulatory, unique circumstances; If the client's wishes conflict with the IPS, discuss and update the IPS.
Pooled funds: For a fund, suitability = consistent with the fund's stated mandate; Not each investor's personal circumstances.

How to solve Suitability (Standard III(C)) questions

Use this order for any III(C) item. It keeps you tied to the facts in the vignette.

1Identify the client type: individual, institution, or a pooled fund with a stated mandate.
2Pull the IPS data from the vignette: return and risk objectives, and constraints (liquidity, horizon, tax, legal, unique needs).
3Check whether the information is current. Look for life events, a changed risk appetite, or a long gap since the last review.
4Identify the action the adviser took or plans to take: a recommendation, a trade, or a failure to ask questions.
5Test the action against the IPS and in a portfolio context: does it fit the whole portfolio, not just the security?
6Decide whether the adviser has met both duties: reasonable inquiry and updating, and suitability.
7Choose the option that names the right corrective action: gather information, update the IPS, discuss with the client, or decline the recommendation.
8Check the wording of the answer against the Standard so you do not pick a partly correct option.

Quickest way: Three-check scan: Client, IPS, Portfolio

When to use it: Use it when time is short and the vignette is long. It works for most III(C) options.

Client: was information collected, and is it up to date?
IPS: does the action sit inside the stated objectives and constraints?
Portfolio: is the effect on total risk and return acceptable?
The wrong option usually fails one check. Pick the option that fixes the failed check.

Common mistakes in Suitability (Standard III(C))

Judging a security as unsuitable because it is risky on its own.
Students think about the asset instead of the portfolio.
Fix: Ask how the holding changes total portfolio risk and return. Small, diversifying positions can be suitable.
Treating the IPS as a one-time document.
The IPS feels like paperwork done at the start.
Fix: Remember the duty to reassess regularly and after material changes in the client's situation or the markets.
Following the client's request that breaks the IPS without any discussion.
Students think the client is always right.
Fix: Discuss the conflict, document it and update the IPS if the change is appropriate. Do not act silently outside the mandate.
Applying individual client needs to a pooled fund.
Students assume all clients are treated alike.
Fix: For a fund, test against the fund's stated mandate, objectives and style.
Choosing 'recommend only after a signed IPS' as always required.
Students overstate the rule.
Fix: The Standard requires reasonable inquiry and a suitability judgement. The IPS is the usual tool, not the only acceptable form.
Ignoring unique circumstances and constraints such as liquidity needs or legal limits.
Students focus on return and risk tolerance alone.
Fix: Go through every constraint category in the IPS before judging suitability.

Worked examples

Example 1

Vignette: Maya Ortiz, a portfolio manager, advises Henrik Larsen, a 58-year-old client who plans to retire in three years. His IPS, set five years ago, states moderate risk tolerance and a need for liquidity at retirement. Henrik has since inherited a large sum and told Maya he is comfortable taking more risk. Maya has not changed the IPS. She now proposes placing 40% of the portfolio in an illiquid private equity fund because its expected return is high. Q1: What has Maya failed to do? Q2: Is the proposal suitable? Q3: What should she do?

Show the solution

Q1: The IPS is five years old and Henrik's circumstances have changed. Maya has not reassessed and updated his information, as the Standard requires.
Q2: The proposal fails the IPS check. Henrik needs liquidity in three years, and a 40% allocation to an illiquid fund conflicts with that constraint. In portfolio context, it concentrates illiquidity in the portfolio.
Higher risk tolerance does not remove the liquidity constraint. A high expected return alone does not make an investment suitable.
Q3: Maya should reassess Henrik's risk tolerance and constraints, update the IPS in discussion with him, and then judge any allocation to illiquid assets. A much smaller allocation may be suitable if it fits the revised IPS.

Answer: Q1: She did not update the client's information and IPS. Q2: Not suitable as proposed, because of the liquidity constraint and the size of the allocation. Q3: Reassess, update the IPS with Henrik, then reconsider a suitable allocation.

Example 2

Vignette: Priya Nair manages the Meridian Income Fund, whose prospectus states an objective of stable income from investment-grade bonds. A long-time investor, Tomas Weber, asks her by email to buy emerging market equities for the fund because he wants growth. Priya considers the idea attractive. Q1: Against what should she test suitability? Q2: Can she buy the equities because Tomas asks? Q3: Which action is consistent with the Standard?

Show the solution

Q1: For a pooled fund, suitability is tested against the fund's stated mandate and objectives, which is investment-grade bonds for stable income. It is not tested against one investor's wishes.
Q2: No. The request conflicts with the mandate. One investor's preference does not change the fund's mandate, and the purchase would be inconsistent with it.
Q3: Priya should decline to change the fund's strategy for one investor. Any change in mandate would need to go through proper channels with disclosure to all investors. She can tell Tomas that other products may fit his growth objective.

Answer: Q1: The fund's stated mandate. Q2: No, it is outside the mandate. Q3: Keep to the mandate and direct Tomas to a suitable alternative, rather than change the fund for one investor.

Exam tips

Read the vignette for dates. A very old IPS or a recent life event usually signals an update failure.
Look for the word 'liquidity', 'tax' or 'time horizon'. Constraints often decide the answer.
If the portfolio is diversified, a single risky position may still be suitable. Check its size and correlation.
When the client is a pooled fund, switch to the mandate test at once.
Prefer answers that gather information and update the IPS over answers that simply refuse or simply comply.

Suitability (Standard III(C)) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Suitability (Standard III(C)): frequently asked questions

What does Standard III(C) require?

It requires reasonable inquiry into the client's experience, risk and return objectives and constraints before advice or action. You must also judge suitability against the client's financial situation and written objectives and constraints. Information must be reassessed and updated regularly.

Does Standard III(C) require a written IPS?

The Standard requires reasonable inquiry and a suitability judgement. A written IPS is the standard tool for recording objectives and constraints, and the Standard refers to the client's written objectives, mandates and constraints. Exam questions treat the IPS as the benchmark for suitability.

How does portfolio context change suitability?

You judge an investment by its effect on total portfolio risk and return, not alone. A risky asset can be suitable as a small, diversifying position. A safe asset can be unsuitable if it adds concentration.

How often must client information be updated?

The Standard says regularly. It gives no fixed interval. In practice you update at set intervals and after material events, such as a change in the client's circumstances or in market conditions.