Client Advisory & Ethical Practices Flashcards
7 cards from real AIP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Client Advisory & Ethical Practices flashcards as text
An investment advisor discovers that a client's portfolio concentration in a single sector now exceeds the client's stated risk tolerance due to market appreciation. What is the advisor's MOST appropriate immediate action?
Answer: Contact the client to discuss rebalancing options and document the conversation
Advisors must proactively communicate when portfolios deviate from stated objectives and document all client interactions.
Under the AIP ethical framework, which of the following BEST describes the 'duty of loyalty' owed to clients?
Answer: Placing client interests ahead of personal or firm interests at all times
The duty of loyalty requires advisors to always put client interests first, subordinating personal and firm interests.
A client asks an AIP-certified advisor to recommend an investment that guarantees a 15% annual return with no risk. The advisor's BEST response is to:
Answer: Explain that no legitimate investment guarantees such returns without risk
Advisors must educate clients about realistic return-risk relationships and cannot represent guaranteed high returns.
When must an investment advisor provide a client with a Form ADV Part 2 brochure?
Answer: At least 48 hours before entering into an advisory agreement
SEC rules require delivery of the Form ADV brochure at least 48 hours before entering an advisory contract or at the time of signing if the client has the right to cancel within five days.
A client's investment policy statement (IPS) specifies no investments in tobacco companies. The advisor inadvertently purchases tobacco sector ETFs. Under ethical practice standards, the advisor should FIRST:
Answer: Inform the client promptly, explain the error, and discuss corrective action
Prompt, transparent disclosure of errors and collaborative corrective action is required under professional ethics standards.
Which scenario MOST clearly constitutes churning under securities regulations?
Answer: An advisor executes frequent trades primarily to generate commissions with little client benefit
Churning is excessive trading primarily to generate commissions rather than to benefit the client's investment objectives.
An advisor receives a referral fee from a third-party service provider for recommending the provider's services to clients. Under ethical practice, the advisor MUST:
Answer: Disclose the referral fee arrangement to clients before making the recommendation
All compensation arrangements that create potential conflicts of interest must be disclosed to clients.