What Are the Know Your Client Rules for Financial Advisors?

Financial advisors are required to meet certain standards when adding new clients to their book of business or selling regulated products to existing clients. As of January 1, 2026, certain SEC-registered investment advisors (RIAs) and exempt-reporting advisors (ERAs) must adhere to Know Your Client (KYC) rules, which fall under the umbrella of anti-money laundering (AML) practices that govern the activity of banks and other financial institutions. Understanding the rule change can help advisors avoid compliance failures.

Add new clients and AUM at your desired pace with SmartAsset’s Advisor Marketing Platform. Sign up for a free demo today.

Understanding Know Your Client Rules

Know Your Client, or Know Your Customer, refers to a set of processes that banks and other financial institutions are expected to follow when establishing business relationships with new customers and maintaining relationships with existing ones. The Financial Industry Regulatory Authority (FINRA) and the Financial Crimes Enforcement Network (FinCEN) oversee compliance with know your client and anti-money laundering regulations in the U.S.

These rules were developed to:

• Combat criminal activity in the financial services industry
• Prevent fraud and identity theft
• Allow financial institutions to accurately measure risk when onboarding new clients
• Build trust in the strength and security of the financial system

Know Your Client rules work by establishing a framework for onboarding new clients and managing existing client accounts. In implementing KYC standards, financial professionals must determine and verify the client’s identity, establish the client’s risk profile to assess the suitability of investments and monitor transactions on an ongoing basis.

The KYC process can be broken down into three core elements.

Customer Identification Program (CIP)

The Customer Identification Program is a Patriot Act provision that was introduced to prevent the funding of terrorism as well as other financial crimes. Under CIP rules, there are a minimum of four pieces of information advisors must collect from clients when establishing new accounts:

• Name
• Date of birth
• Address
• Customer identification number

All of this information is required for identity verification and it must be collected within a reasonable time when establishing new client accounts.

For U.S. clients, the customer identification number refers to their tax ID number, which is typically a Social Security number. Non-U.S. citizens may offer a passport number, alien identification card number or an identification number present on government-issued documents from their home country instead.

Customer Due Diligence (CDD)

The second phase of KYC is designed to help professionals understand who they’re working with, in terms of where the client is located and the types of business activities or financial transactions they engage in. Here, the goal is to determine the suitability of working with a particular client and assess any potential risks they may pose.

For example, if a client routinely moves substantial amounts of money into international bank accounts, you’d likely want to investigate further to ensure that it’s not related to any illegal activity. There’s also a second dimension to assessing risk for advisors under FINRA Rule 2111.

Broker-dealers are expected to adhere to a suitability standard in making investment recommendations. That means they must consider the client’s goals, needs and risk tolerance to select investments that meet the standard. This is different from the best interest standard that fiduciaries are obligated to uphold.

Enhanced Due Diligence (EDD)

Once you’ve onboarded a new client, continued monitoring is required under KYC rules. The level of monitoring required for client accounts can depend largely on what you learn during the initial due diligence phase.

Enhanced due diligence is most often associated with clients who pose an elevated risk. That risk may be tied to where they’re located, the type of work they engage in or their financial transaction history. For example, a sudden uptick in cross-border transactions or a pattern of unusually large deposits could be indicators of illicit activity.

Client Acquisition Simplified: For RIAs

• Ideal for RIAs looking to scale.
• Validated referrals to help build your pipeline efficiently.
• Save time + optimize your close rate with high-touch, pre-built campaigns.

CFP®, CEO

Joe Anderson

Pure Financial Advisors

We have seen a remarkable return on investment and comparatively low client acquisition costs even as we’ve multiplied our spend over the years.

Pure Financial Advisors reports $1B in new AUM from SmartAsset investor referrals.

Target New Clients This Year

I am a registered fiduciary*

Book Your Free DemoNot sure? Learn more about AMP.

Know Your Client Rule Requirements for Advisors

In 2024, FinCEN issued a final rule adding certain investment advisors and exempt-reporting advisors to the list of entities subject to KYC regulations. ¹ The rule change, which took effect Jan. 1, 2026, marks an attempt to curb illicit financial activity in the investment advisor sector.

Advisors who are subject to the KYC rule change must meet certain standards to be compliant. FinCEN is transparent about what’s required, which includes the following.

Advisors who had a KYC compliance program in place prior to the implementation of the rule change are encouraged by FinCEN to review it against the updated requirements.

Reporting Suspicious Activity

If an advisor suspects suspicious activity, they’re required to file a Suspicious Activity Report (SAR). You can do so electronically through the BSA E-filing System. A SAR filing is triggered when:

• Transactions conducted or attempted by, at, or through an investment advisor;
• Involving funds or assets of at least $5,000; and
• The investment advisor knows, suspects or has reason to suspect one of the following:
  • The transaction involves funds derived from illegal activity;
  • The transaction is designed to evade reporting requirements;
  • The transaction doesn’t make sense for the customer; or
  • The transaction involves the use of the investment advisor to facilitate criminal activity.

If you’re unsure how to navigate the new KYC rules, you may find it helpful to get expert advice. For example, an anti-money laundering analyst or an RIA compliance consultant can review your current compliance policies to ensure that you’re meeting FINRA and FinCEN standards.

Which Advisors Are Subject to Know Your Client Rules?

If you don’t qualify for an exemption, you’re required to ensure compliance.

Tips for Staying Compliant With KYC Rules

Complying with KYC rules can help avoid enforcement actions, including penalties for noncompliance. Reviewing your current onboarding process can help you identify areas where you may be lacking or need to adjust.

At a minimum, it’s critical for advisors to:

• Collect and organize the required documents to establish the client’s identity.
• Make a concerted effort to verify the client’s identity, based on the submitted documentation.
• Verify the client’s residency and citizenship status.
• Confirm the details of the client’s financial situation, including their assets and liabilities.
• Apply the suitability standard when recommending investments, if required to do so as a broker-dealer.
• Monitor client transactions on an ongoing basis and flag any activities that seem suspicious or outside the ordinary pattern of behavior.
• Investigate any flagged transactions to determine whether any illegal activity is occurring.

These are all tasks that a compliance officer may be tasked with handling. Advisors may also consider the use of digital tools to ensure compliance.

Electronic or eKYC processes can prove more efficient for advisors while also improving accuracy and reducing some of the financial costs of ensuring compliance. Relying on digital tools to conduct KYC tasks can also improve the client experience during onboarding and beyond.

Frequently Asked Questions

Bottom Line

Know Your Client rules are an important compliance requirement for wealth management firms, broker-dealers and other financial services institutions. For advisors, understanding these rules and when they apply is essential for staying on the right side of regulatory guidelines while serving your client base.

Tips for Growing Your Advisory Business

• One of the most challenging aspects of growing an advisory business is cultivating a loyal client base. SmartAsset AMP (Advisor Marketing Platform) is our holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
• When seeking new clients, it’s important to clarify what standard you use when offering investment advice. If you’re a fiduciary, for example, you’re obligated to select investments based on the best interest of the clients. Financial professionals who are held to a suitability standard, on the other hand, only have to choose investments that are deemed suitable based on the client’s needs and situation. A registered investment advisor is an example of a fiduciary, while broker-dealers are held to a suitability standard under federal law.

Photo credit: ©iStock.com/shapecharge, ©iStock.com/Jovanmandic, ©iStock.com/shapecharge