Ethics & Investment Consulting Process Flashcards

A CIMA professional serves on the investment committee of a charity where her firm is also a paid consultant. She should:

Answer: Disclose the dual role to both parties and manage the conflict appropriately

Serving in dual roles creates a potential conflict of interest that must be fully disclosed to all affected parties.

Which statement BEST describes the purpose of the 'monitoring and reporting' phase in the investment consulting process?

Answer: To evaluate whether the portfolio continues to meet the client's objectives and IPS guidelines

Monitoring and reporting ensures ongoing alignment between portfolio outcomes and the client's documented objectives and constraints.

Under the CIMA code, 'competence' requires that professionals:

Answer: Maintain and develop the knowledge and skills needed to provide high-quality advice

Competence under CIMA standards means continuously developing skills and knowledge to serve clients effectively and professionally.

When evaluating alternative investments for an endowment, which due diligence factor is UNIQUE to private equity compared to public equity?

Answer: J-curve effect and illiquidity premium assessment

The J-curve—early negative returns before gains materialize—and the illiquidity premium are unique considerations specific to private equity investments.

A consultant recommends a specific mutual fund family to all clients primarily because the fund family provides the consultant's firm with research and office space. Under CIMA standards, this practice:

Answer: Violates the duty of loyalty due to an undisclosed conflict of interest

Recommending funds based on undisclosed benefits received by the firm constitutes a breach of the duty of loyalty to clients.

In strategic asset allocation, the mean-variance optimization framework is criticized primarily because it:

Answer: Is highly sensitive to input assumptions, making small estimation errors produce large allocation changes

Mean-variance optimization is input-sensitive; small changes in expected return or covariance estimates can drastically shift the resulting optimal allocations.

A CIMA consultant is asked to provide a fairness opinion on a proposed merger for which her firm will earn a success fee only if the deal closes. The PRIMARY ethical concern is:

Answer: A contingent fee structure that compromises the objectivity of the fairness opinion

Success-fee-only arrangements create a financial incentive to approve the deal, directly compromising the objectivity required for a fairness opinion.