CRPC - Chartered Retirement Planning Counselor Ethical and Fiduciary Duties Questions and Answers — Questions and Answers
Question 1: A CRPC® is meeting with a new retirement planning client. The advisor recommends a specific managed mutual fund that aligns with the client's risk tolerance. However, a nearly identical, lower-cost index fund (ETF) exists that would also meet the client's objectives. The managed fund pays the advisor's firm a 12b-1 fee, while the ETF does not. Under the fiduciary duty of loyalty, what is the primary ethical issue in this situation?
- The advisor failed to recommend a sufficiently diversified portfolio.
- A conflict of interest exists where the advisor's compensation may have improperly influenced the investment recommendation. (Correct answer)
- The advisor is recommending an actively managed fund, which is inherently riskier than a passive index fund.
- The client was not given a formal, written financial plan before the recommendation was made.
Correct answer: A conflict of interest exists where the advisor's compensation may have improperly influenced the investment recommendation.
The duty of loyalty requires an advisor to place the client's interests above their own. Recommending a higher-cost product that provides the advisor with extra compensation (the 12b-1 fee) when a comparable, cheaper alternative exists represents a material conflict of interest. A fiduciary must act to avoid or, at a minimum, disclose such conflicts and ensure the recommendation is still in the client's best interest, which is difficult to justify when a less expensive and equally suitable option is available.
Question 2: Which of the following is a core component of the fiduciary 'duty of prudence'?
- Ensuring all material conflicts of interest are disclosed to the client.
- Placing the client's interests above the interests of the advisor and their firm.
- Acting with the care, skill, and diligence that a knowledgeable professional would use in similar circumstances. (Correct answer)
- Executing all of a client's lawful and reasonable instructions as instructed.
Correct answer: Acting with the care, skill, and diligence that a knowledgeable professional would use in similar circumstances.
The duty of prudence specifically requires an advisor to act with a high level of competence. This means applying the care, skill, prudence, and diligence expected of a professional in that field. Disclosing conflicts and placing the client's interest first are components of the duty of loyalty. Following client instructions is a separate duty.
Question 3: A CRPC®, who is also a registered representative of a broker-dealer, recommends a client purchase a variable annuity. Under the SEC's Regulation Best Interest (Reg BI), which of the following actions is required to satisfy the 'Care Obligation'?
- Guaranteeing that the annuity will outperform the client's previous investments.
- Disclosing in writing that the advisor will receive a commission from the sale.
- Having a reasonable basis to believe the annuity is in the client's best interest and considering reasonably available alternatives. (Correct answer)
- Providing the client with the prospectuses of at least three different annuity providers.
Correct answer: Having a reasonable basis to believe the annuity is in the client's best interest and considering reasonably available alternatives.
Regulation Best Interest (Reg BI) requires broker-dealers to adhere to four component obligations: Disclosure, Care, Conflict of Interest, and Compliance. The Care Obligation specifically requires the representative to exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs of the recommendation. They must have a reasonable basis to believe the recommendation is in the customer's best interest and that it doesn't place the broker's interest ahead of the customer's. A key part of this is considering reasonably available alternatives.
Question 4: A client is considering rolling over their 401(k) from a previous employer into an IRA managed by their CRPC®. This transaction would move the client from a low-cost plan protected by ERISA to an IRA where the advisor will earn an asset-based fee. Under current Department of Labor (DOL) guidance, what is the advisor's MOST critical responsibility?
- To ensure the IRA offers a wider selection of investment choices than the 401(k).
- To advise the client to wait until they are at least age 59.5 to avoid penalties.
- To document the specific reasons why the rollover is in the client's best interest, considering factors like costs, services, and investment options. (Correct answer)
- To get written permission from the former employer's plan administrator before proceeding.
Correct answer: To document the specific reasons why the rollover is in the client's best interest, considering factors like costs, services, and investment options.
The Department of Labor (DOL) considers a recommendation to roll over assets from an ERISA-governed plan (like a 401(k)) to be fiduciary advice. The advisor must perform a diligent analysis and document why the move is in the client's best interest. This involves a careful comparison of the fees, services, investment options, and fiduciary protections in the 401(k) versus the proposed IRA. Simply having more investment choices is not sufficient justification on its own.
Question 5: A client gives their CRPC® a direct and lawful instruction to sell a specific stock from their advisory account, even though the advisor believes it is a poor long-term decision. The advisor has clearly communicated their opposing view and the potential negative consequences. Under the advisor's fiduciary duties, what is the most appropriate next step?
- Refuse to make the trade because it is not in the client's best interest.
- Execute the client's instruction as requested. (Correct answer)
- Sell only half of the position as a compromise.
- Inform the client that the advisor must first get approval from their firm's compliance department.
Correct answer: Execute the client's instruction as requested.
A core fiduciary duty is the duty to follow a client's lawful and reasonable instructions. While the advisor must act in the client's best interest, this does not give them the right to override a client's direct order regarding their own assets, provided the advisor has fulfilled their duty to inform the client of the risks. Refusing the order would violate this duty.
Question 6: All of the following are potential breaches of an advisor's fiduciary duty EXCEPT:
- Failing to disclose that the advisor's firm will receive a higher fee for recommending an affiliated mutual fund.
- Allocating a favorable IPO investment to a large institutional client instead of a smaller retail client for whom it was also suitable.
- Conducting a quarterly portfolio rebalance to bring asset allocations back in line with the client's documented investment policy statement. (Correct answer)
- 'Reverse churning,' where a client pays a consistent asset-based fee in an account with very little trading activity.
Correct answer: Conducting a quarterly portfolio rebalance to bring asset allocations back in line with the client's documented investment policy statement.
Conducting a systematic rebalance according to a pre-established and agreed-upon investment policy is a standard and essential part of prudent portfolio management; it is an action that fulfills a fiduciary duty. The other options are breaches: failing to disclose a conflict of interest violates the duty of loyalty, unfairly allocating trades violates the duty to act in good faith, and reverse churning is a form of overcharging that violates the duty to ensure fees are reasonable.
CRPC - Chartered Retirement Planning Counselor Ethical and Fiduciary Duties Questions and Answers
A CRPC® is meeting with a new retirement planning client.
The advisor recommends a specific managed mutual fund that aligns with the client's risk tolerance.
However, a nearly identical, lower-cost index fund (ETF) exists that would also meet the client's objectives.
The managed fund pays the advisor's firm a 12b-1 fee, while the ETF does not.
Under the fiduciary duty of loyalty, what is the primary ethical issue in this situation?