Fiduciary Duty and Responsibilities Flashcards

A Certified Investment Counselor (CIC) is managing a portfolio for a new client. The counselor's firm has a proprietary mutual fund that has historically underperformed its benchmark, but generates higher fees for the firm than other available options. Recommending this fund to the client would primarily be a breach of which fiduciary duty?

Answer: The duty of loyalty

The duty of loyalty requires an investment adviser to put their client's interests first and not favor their own interests over those of a client. Recommending a high-fee, underperforming proprietary fund to generate more revenue for the firm is a classic example of a conflict of interest and a breach of the duty of loyalty, as the client's best interest is subordinated to the counselor's and the firm's financial gain.

Under the Investment Advisers Act of 1940, the fiduciary duty owed by an investment adviser to a client is comprised of which two primary components?

Answer: Duty of Care and Duty of Loyalty

The U.S. Securities and Exchange Commission (SEC) has consistently interpreted the fiduciary duty under the Investment Advisers Act of 1940 as being composed of the duty of care and the duty of loyalty. The duty of care involves providing suitable advice and best execution, while the duty of loyalty requires the adviser to place the client's interests ahead of their own.

A CIC is advising a client on their retirement portfolio. The counselor performs a thorough analysis of the client's risk tolerance, time horizon, and financial goals. Based on this, the counselor constructs a well-diversified portfolio using low-cost index funds and monitors it regularly. This approach is a clear demonstration of adherence to which of the following principles?

Answer: The prudent investor rule

The prudent investor rule requires a fiduciary to manage a portfolio by considering the portfolio as a whole and as part of an overall investment strategy. This includes evaluating the client's risk tolerance and goals, diversifying investments to avoid uncompensated risk, and monitoring the portfolio. The counselor's actions align directly with these core tenets.

Which of the following actions would be considered a violation of a Certified Investment Counselor's fiduciary duty of care?

Answer: Failing to conduct due diligence on a complex investment product before recommending it.

The duty of care requires an adviser to have a reasonable basis for their investment advice. This includes conducting a reasonable investigation into an investment to ensure it is in the client's best interest and that the advice is not based on materially inaccurate or incomplete information. Failing to perform this due diligence is a direct breach of the duty of care.

A CIC discovers a highly attractive, but limited, investment opportunity. The counselor has several clients for whom the investment would be suitable. To comply with the fiduciary duty of loyalty, what is the MOST appropriate course of action?

Answer: Allocate the investment pro-rata among all suitable clients in a fair and equitable manner.

The duty of loyalty requires that an adviser must not unfairly favor one client over another. When dealing with limited opportunities suitable for multiple clients, the fiduciary must have a fair and equitable method for allocation. A pro-rata allocation is a common and accepted method to ensure clients are treated fairly.

An investment counselor's fiduciary responsibility to a client is established by which of the following?

Answer: The nature of the advisory relationship and federal law, such as the Investment Advisers Act of 1940.

The fiduciary duty for an investment adviser is not optional; it is established by law, primarily the Investment Advisers Act of 1940. The Supreme Court affirmed that the nature of the relationship, which is built on trust and confidence, legally requires the adviser to act as a fiduciary.