CIC Fiduciary Duty and Responsibilities 4 — Questions and Answers
Question 1: A client's investment portfolio has become highly concentrated in one stock due to significant appreciation. The fiduciary advisor recommends diversification, but the client refuses due to emotional attachment. What should the advisor do?
- Force the sale to comply with fiduciary duty
- Document the client's informed refusal and continue to advise on the risks (Correct answer)
- Resign from the advisory relationship immediately
- Sell the position without client consent to protect them
Correct answer: Document the client's informed refusal and continue to advise on the risks
After providing competent advice and disclosing risks, advisors must respect client autonomy; documenting the client's informed refusal fulfills fiduciary duty.
Question 2: Which of the following constitutes self-dealing by a fiduciary investment counselor?
- Charging a flat advisory fee disclosed in the client agreement
- Purchasing securities for personal accounts before executing client orders in the same securities (Correct answer)
- Recommending tax-loss harvesting strategies to benefit the client
- Diversifying a client's portfolio across asset classes
Correct answer: Purchasing securities for personal accounts before executing client orders in the same securities
Front-running client orders by trading in the same securities for personal accounts first is a form of self-dealing that violates fiduciary duty.
Question 3: Under the Uniform Prudent Investor Act (UPIA), how should a trustee evaluate investment decisions?
- By evaluating each investment in isolation for its own merit
- By considering each investment in the context of the entire portfolio and overall investment strategy (Correct answer)
- By focusing exclusively on capital preservation
- By matching the investment approach to the previous trustee's strategy
Correct answer: By considering each investment in the context of the entire portfolio and overall investment strategy
The UPIA adopts modern portfolio theory, requiring trustees to evaluate investments in the context of the whole portfolio rather than in isolation.
Question 4: A fiduciary discovers that a colleague has been misappropriating client funds. What is the fiduciary's obligation?
- Handle the matter internally without involving regulators to protect the firm
- Report the misconduct to appropriate regulatory authorities and take steps to protect affected clients (Correct answer)
- Wait for the client to discover the issue before taking action
- Document the concern in personal notes but take no further action
Correct answer: Report the misconduct to appropriate regulatory authorities and take steps to protect affected clients
Fiduciaries have a duty to report known misconduct and protect clients from harm, which may require reporting to regulators such as the SEC.
Question 5: What is the primary purpose of requiring investment advisors to provide clients with Form ADV?
- To establish the fee schedule for advisory services
- To disclose material information about the advisor including conflicts of interest and disciplinary history (Correct answer)
- To authorize the advisor to act as a fiduciary
- To document the client's investment objectives and risk tolerance
Correct answer: To disclose material information about the advisor including conflicts of interest and disciplinary history
Form ADV is a disclosure document required by the SEC that provides clients with material information about the advisor, including potential conflicts of interest.
Question 6: An advisor who simultaneously acts as both investment counselor and insurance agent for the same client must:
- Immediately terminate one of the professional relationships
- Disclose the dual roles and any resulting conflicts of interest to the client (Correct answer)
- Obtain approval from the SEC before serving in dual capacities
- Apply only the insurance suitability standard to all recommendations
Correct answer: Disclose the dual roles and any resulting conflicts of interest to the client
Dual roles create potential conflicts that must be fully disclosed to clients so they can make informed decisions about the advisory relationship.
Question 7: Which fiduciary principle requires an investment counselor to keep client information confidential?
- Duty of loyalty
- Duty of care
- Duty of confidentiality (Correct answer)
- Duty of impartiality
Correct answer: Duty of confidentiality
The duty of confidentiality requires fiduciaries to protect client information and not disclose it without proper authorization or legal requirement.
CIC Fiduciary Duty and Responsibilities 4
A client's investment portfolio has become highly concentrated in one stock due to significant appreciation.
The fiduciary advisor recommends diversification, but the client refuses due to emotional attachment.
What should the advisor do?