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 advisor's firm is acquired by a larger institution that sells proprietary products. Following the acquisition, the advisor begins recommending these proprietary products exclusively. This practice MOST likely violates which principle?
Answer: Objectivity, because product recommendations are being driven by firm affiliation rather than client suitability
Exclusively recommending affiliated products without regard for suitability compromises objectivity and constitutes a conflict of interest.
A client in their 30s with a high income and long investment horizon expresses extreme anxiety about any short-term portfolio losses. How should the advisor BEST reconcile the client's objective capacity for risk with their emotional tolerance for risk?
Answer: Design a portfolio that respects both factors, potentially using lower volatility instruments than capacity alone would suggest
Suitability requires balancing both objective financial capacity for risk and the client's subjective psychological tolerance for volatility.
When an advisor identifies a situation where client interests conflict with the interests of the advisor's employing firm, the ethical response under AIP standards is to:
Answer: Prioritize the client's interests and escalate the conflict to compliance if necessary
Client interests take precedence over firm interests, and conflicts must be escalated to compliance for resolution.
A prospective client provides false information about their net worth to qualify for a hedge fund investment. Once discovered, the advisor should:
Answer: Refuse to process the investment, correct the records, and potentially terminate the relationship
Advisors cannot facilitate investments based on fraudulent client representations and must correct records and decline the transaction.
Which of the following BEST describes the purpose of an investment policy statement (IPS) in the client advisory relationship?
Answer: To document the client's goals, constraints, and guidelines to govern portfolio management
An IPS serves as a governance document that defines client objectives, risk tolerance, constraints, and investment guidelines.
An advisor uses a standardized risk questionnaire for all clients without considering individual circumstances beyond the questionnaire responses. This approach MOST likely fails which ethical duty?
Answer: Diligence and thoroughness in the know-your-customer process
Adequate due diligence requires going beyond standardized questionnaires to understand each client's full financial and personal situation.
An advisor discovers that a long-standing client is likely being financially exploited by a family member. The advisor is a mandatory reporter under applicable state law. The advisor's FIRST obligation is to:
Answer: Report the suspected exploitation to the appropriate adult protective services or regulatory authority as required by law
Where mandatory reporting laws apply, advisors must report suspected elder or vulnerable-client financial exploitation to the appropriate authorities.