Know Your Clients’ Behaviours: A Cluster Analysis of Financial Transactions

In Canada, financial advisors and dealers are required by provincial securities commissions and self-regulatory organizationscharged with direct regulation over investment dealers and mutual fund dealersto respectively collect and maintain know your client (KYC) information, such as their age or risk tolerance, for investor accounts. With this information, investors, under their advisors guidance, make decisions on their investments that are presumed to be beneficial to their investment goals. Our unique dataset is provided by a financial investment dealer with over 50,000 accounts for over 23,000 clients covering the period from January 1st to August 12th 2019. We use a modified behavioral finance recency, frequency, monetary model for engineering features that quantify investor behaviours, and unsupervised machine learning clustering algorithms to find groups of investors that behave similarly. We show that the KYC informationsuch as gender, residence region, and marital statusdoes not explain client behaviours, whereas eight variables for trade and transaction frequency and volume are most informative. Hence, our results should encourage financial regulators and advisors to use more advanced metrics to better understand and predict investor behaviours.