Introduction

Hook: Clear, honest disclosure is the single best tool you have to protect clients and reduce regulatory risk.

Friendly definition: Relationship disclosure is the written communication that sets client expectations about services, account operation, costs, risks and the registrant’s responsibilities. It is also described as "a written communication that explains the services, account types, fees and costs, account operation, reporting, risks, conflicts, and suitability processes that apply to a client–registrant relationship." Use this document to make sure clients understand what they are buying, how an account will work, who decides what, and what fees and conflicts exist.

For practical guidance from regulators and industry bodies, see CIRO’s resources on Relationship Disclosure and Know‑Your‑Client and the CSA/MFDA/IIROC Client Focused Reforms FAQs.

Core Concepts (Recall)

Relationship disclosure must identify, in clear language, the core categories of a client–registrant relationship:

• Services and products offered (advisory, discretionary portfolio management, execution‑only, mutual funds, ETFs, derivatives, specialty services).
• Types of accounts and how they operate (cash, margin, registered plans, managed discretionary accounts, custody‑only arrangements).
• Principal features and material risks of investments and strategies (including liquidity, valuation uncertainty, tracking error and market risk where relevant).
• Initial and ongoing costs clients will bear — both direct and indirect — and general descriptions of third‑party benefits the dealer or approved person may receive.
• How suitability will be determined and maintained — describing KYC collection, the firm’s KYP practices and the decision framework used to recommend or accept investments.

Key definitions you should quote or paraphrase in client materials:

• KYC (Know‑Your‑Client): The process of collecting client information (financial situation, objectives, risk tolerance, time horizon, investment knowledge, outside holdings) necessary to make suitability determinations.
• KYP (Know‑Your‑Product): The process by which a registrant understands the features, risks and costs of products and services it recommends or sells.
• Suitability determination: The analysis and decision‑making framework by which a registrant determines whether a product or service is appropriate for a client given KYC information and KYP analysis.

Detailed Analysis (Understand)

Why this matters: The purpose of relationship disclosure is to set realistic expectations, reveal costs and conflicts, describe operational responsibilities such as order handling and custody, and document the suitability framework the firm will use when recommending or accepting investments. A clear, tailored disclosure helps clients judge potential bias in recommendations and understand the practical effects of service choices on reporting, fees and risk.

How to do it right:

• Tailoring is not optional. Registrants must use professional judgment to adapt disclosure to the firm’s business model and the actual services provided — boilerplate language alone does not meet the CFRs’ standards. If a firm operates multiple business models (for example dealer, discretionary manager and custody‑only), the relationship disclosure must distinguish the differences in service level, responsibilities and potential conflicts that come with each model so clients can compare and choose appropriately.

• Explain authority and decision rights. The operational differences between advisory, discretionary and execution‑only relationships — especially who makes the investment decisions and when client consent is required — must be explained so clients understand the level of authority the registrant holds. For example, a firm that offers discretionary portfolio management and execution‑only accounts must clarify that a discretionary mandate allows trading without prior client approval, whereas execution‑only executes client instructions without providing advice.

• Match detail to complexity. In practice, this means that an index ETF should have plain‑language disclosure about tracking error and market risk, whereas a private illiquid fund requires stronger emphasis on liquidity risk, valuation uncertainty and potential loss of capital; the tone and level of detail should match the product’s complexity and the client’s likely sophistication.

For drafting pointers and regulatory interpretation, review the Client Focused Reforms Frequently Asked Questions and CIRO guidance on relationship disclosure.

Practical Application

Scenario 1 — Margin account: Your relationship disclosure must explain borrowing mechanics, margin calls, the potential for forced liquidation, and applicable interest and fee calculations. Be explicit about how interest and fees are calculated and displayed on client reports.

Scenario 2 — Fee‑based discretionary account with leveraged ETFs: Explain how leverage and rebalancing affect returns in addition to advisory fees, ETF MERs and trading costs that reduce net performance. Describe how KYC and KYP feed into ongoing suitability reviews.

Scenario 3 — Custody‑only arrangement: The disclosure should explain the limited scope of the firm’s responsibilities (safekeeping and reporting but no advice), any trading restrictions, and whether the firm receives third‑party fees for record‑keeping or referral relationships — all of which affect suitability for that client.

When assessing sample disclosures, read for clarity, completeness and whether conflicts and the suitability process are described with enough detail for the firm’s business model. Firms must also describe when they may decline to accept or continue an account and the steps taken when an instruction appears unsuitable — marking an order “unsolicited” is not sufficient by itself under the CFRs.

Key Takeaways

• Relationship disclosure must describe services, products and account types and explain operational differences between advisory, discretionary and execution‑only relationships.
• Disclosures must identify principal features and material risks, and set out initial and ongoing costs including indirect or third‑party compensation.
• The document must explain how suitability is determined and maintained (KYC, KYP, risk profiling, review frequency and escalation).
• Tailor disclosures to the firm’s business model; generic boilerplate is insufficient under the CFRs.
• Include order handling, custody, margin mechanics and reporting cadence; be explicit about performance and fee calculation methodologies.

Further reading: CIRO’s Relationship Disclosure guidance, the CSA/MFDA/IIROC Client Focused Reforms FAQs (April 2022), CIRO’s Know‑Your‑Client and suitability guidance, and related OCI materials provide practical examples and regulator expectations.