CMFAS Financial Advisory Ethics 3 — Questions and Answers
Question 1: What is the duty of disclosure for a financial adviser?
- To disclose only positive information
- To disclose all material information including fees, risks, and conflicts of interest (Correct answer)
- To disclose information only when asked
- To disclose only product features
Correct answer: To disclose all material information including fees, risks, and conflicts of interest
Financial advisers must proactively disclose all material information including product risks, fees, charges, and any conflicts of interest to enable informed decision-making.
Question 2: What is professional indemnity insurance for financial advisers?
- Life insurance for the adviser
- Insurance that protects the adviser against claims arising from professional negligence (Correct answer)
- Health insurance for the adviser
- Insurance sold to clients
Correct answer: Insurance that protects the adviser against claims arising from professional negligence
Professional indemnity insurance protects financial advisers against claims and legal costs arising from errors, omissions, or negligence in their professional services.
Question 3: What ethical principle requires a financial adviser to be competent?
- Integrity
- Confidentiality
- Professionalism and competence (Correct answer)
- Objectivity
Correct answer: Professionalism and competence
The principle of professionalism and competence requires advisers to maintain adequate knowledge, skills, and expertise to provide sound financial advice.
Question 4: What should a financial adviser do when a client wants to invest in a product beyond their risk tolerance?
- Proceed with the sale immediately
- Advise against it, explain the risks, and document the client's decision if they insist (Correct answer)
- Refuse to serve the client
- Recommend an even riskier product
Correct answer: Advise against it, explain the risks, and document the client's decision if they insist
The adviser should explain why the product may be unsuitable, outline the risks, and if the client still insists, document the client's informed decision and acknowledgement of the risks.
Question 5: What is the purpose of the client fact-find document?
- To advertise products
- To record comprehensive information about the client's financial situation and needs (Correct answer)
- To calculate the adviser's commission
- To process insurance claims
Correct answer: To record comprehensive information about the client's financial situation and needs
The client fact-find document records detailed information about the client's financial situation, objectives, risk appetite, and existing coverage to form the basis of suitable recommendations.
Question 6: What is the significance of the 'best advice' obligation?
- The adviser must give the cheapest option
- The adviser must recommend the product that best meets the client's needs from available options (Correct answer)
- The adviser must recommend the most popular product
- The adviser must recommend their own company's products
Correct answer: The adviser must recommend the product that best meets the client's needs from available options
The best advice obligation requires the adviser to recommend the product that is most suitable for the client's specific needs and circumstances from the available options.
CMFAS Financial Advisory Ethics 3
What is the duty of disclosure for a financial adviser?