CIM Client Relations 3 — Questions and Answers
Question 1: A client keeps holding a losing stock and says they will sell 'once it gets back to what I paid.' Which bias is this?
- Home bias
- Overconfidence
- Recency bias
- Disposition effect / loss aversion (Correct answer)
Correct answer: Disposition effect / loss aversion
Holding losers to avoid locking in a loss is the disposition effect, which comes from loss aversion.
Question 2: Which approach usually works best with a client who shows strong anchoring bias?
- Reframe decisions around current fundamentals and forward-looking expectations (Correct answer)
- Immediately sell all positions
- Ignore the bias and execute the client's wishes
- Only communicate in writing once a year
Correct answer: Reframe decisions around current fundamentals and forward-looking expectations
Moving the client's attention from a historical reference price to current information reduces anchoring.
Question 3: According to behavioral finance guidance, which kind of bias should managers generally adapt to rather than try to correct, especially for wealthy clients?
- Emotional biases such as loss aversion (Correct answer)
- Information-processing mistakes
- Arithmetic errors
- Cognitive biases in low-wealth clients
Correct answer: Emotional biases such as loss aversion
Emotional biases are hard to change, so managers often adapt to them, especially when the client's wealth gives them room to.
Question 4: A client asks the manager to guarantee that the portfolio will not lose money this year. What is the appropriate response?
- Recommend leveraged products to boost certainty
- Agree to keep the client happy
- Explain that returns can't be guaranteed and discuss risk-appropriate strategies (Correct answer)
- Promise to reimburse any losses personally
Correct answer: Explain that returns can't be guaranteed and discuss risk-appropriate strategies
Guaranteeing investment results is misleading and generally prohibited; managers must communicate risk honestly.
Question 5: Which is the most effective way to report performance to clients?
- Report only cumulative returns since inception
- Show returns against an appropriate benchmark and the client's IPS objectives, net of fees (Correct answer)
- Report gross returns without benchmarks
- Show only the best-performing holdings
Correct answer: Show returns against an appropriate benchmark and the client's IPS objectives, net of fees
Fair reporting compares net-of-fee results with relevant benchmarks and the client's stated goals.
Question 6: Under Regulation Best Interest, a broker-dealer making a recommendation to a retail customer must meet which obligations?
- A fiduciary duty identical to ERISA
- Only a disclosure obligation
- Disclosure, care, conflict of interest, and compliance obligations (Correct answer)
- Only a suitability obligation
Correct answer: Disclosure, care, conflict of interest, and compliance obligations
Reg BI's general obligation is met through disclosure, care, conflict-of-interest, and compliance components.
Question 7: A client keeps calling during market volatility asking to move entirely to cash. What should the manager do first?
- Revisit the client's IPS, goals, and time horizon, and explain the risks of market timing (Correct answer)
- Move the client into a higher-risk portfolio
- Execute immediately without discussion
- Refuse to speak with the client
Correct answer: Revisit the client's IPS, goals, and time horizon, and explain the risks of market timing
Going back to the agreed plan and long-term objectives helps prevent emotionally driven decisions while respecting the client's authority.
CIM Client Relations 3
A client keeps holding a losing stock and says they will sell 'once it gets back to what I paid.' Which bias is this?