CIC Fiduciary Duty and Responsibilities 2 — Questions and Answers
Question 1: A CIC discovers that a recommended investment would generate a higher commission for the advisor than an equally suitable alternative. Under fiduciary duty, what must the advisor do?
- Select the higher-commission investment since it meets suitability standards
- Disclose the conflict and recommend the investment that best serves the client's interest (Correct answer)
- Avoid all commission-based products entirely
- Seek approval from a compliance officer before making any recommendation
Correct answer: Disclose the conflict and recommend the investment that best serves the client's interest
Fiduciaries must disclose conflicts of interest and always act in the client's best interest, not their own financial interest.
Question 2: Which legal doctrine holds that fiduciaries must not place their own interests above those of their clients?
- Duty of loyalty (Correct answer)
- Duty of care
- Prudent investor rule
- Business judgment rule
Correct answer: Duty of loyalty
The duty of loyalty requires fiduciaries to subordinate their personal interests to those of the client at all times.
Question 3: An investment counselor manages a discretionary account and executes trades without client authorization on each transaction. Is this permissible under a fiduciary relationship?
- No, every trade requires explicit client approval
- Yes, if a written discretionary agreement was signed by the client (Correct answer)
- Yes, only for trades under $10,000
- No, discretionary authority violates fiduciary duty
Correct answer: Yes, if a written discretionary agreement was signed by the client
A properly executed written discretionary agreement grants the advisor authority to trade without per-transaction approval, consistent with fiduciary obligations.
Question 4: Under ERISA, which standard applies to investment advisors managing pension plan assets?
- Suitability standard
- Best execution standard
- Fiduciary standard (Correct answer)
- Reasonable investor standard
Correct answer: Fiduciary standard
ERISA imposes a strict fiduciary standard on anyone who exercises discretionary authority or control over plan assets.
Question 5: A fiduciary investment counselor learns of a business opportunity that would benefit both the client's portfolio and the advisor personally. What is the appropriate course of action?
- Pursue the opportunity personally before recommending it to the client
- Recommend the opportunity to the client first, ensuring client interests are prioritized (Correct answer)
- Avoid the opportunity entirely to prevent any conflict
- Split the opportunity equally between the advisor and client
Correct answer: Recommend the opportunity to the client first, ensuring client interests are prioritized
Fiduciaries must give priority to client opportunities and cannot usurp business opportunities that rightfully belong to the client.
Question 6: Which of the following best describes the concept of 'informed consent' in the fiduciary context?
- The client signs all trade confirmations within 24 hours
- The client acknowledges understanding the risks after receiving full material disclosure (Correct answer)
- The client waives all liability for investment losses
- The advisor documents all decisions in writing
Correct answer: The client acknowledges understanding the risks after receiving full material disclosure
Informed consent requires the fiduciary to provide full material disclosure so the client can make a knowledgeable decision about the relationship.
Question 7: A client instructs their CIC to invest only in socially responsible funds, even if returns may be lower. How should the fiduciary respond?
- Refuse, as fiduciary duty requires maximizing returns
- Follow the client's instructions, as client preferences are a legitimate investment objective (Correct answer)
- Require the client to sign a waiver before proceeding
- Seek a court order to override the client's wishes
Correct answer: Follow the client's instructions, as client preferences are a legitimate investment objective
Fiduciary duty includes following lawful client directives; client values and preferences are valid investment objectives.
CIC Fiduciary Duty and Responsibilities 2
A CIC discovers that a recommended investment would generate a higher commission for the advisor than an equally suitable alternative.
Under fiduciary duty, what must the advisor do?