CRPC Ethical and Fiduciary Duties 2 — Questions and Answers
Question 1: A CRPC designee discovers that a client's current annuity generates high commissions but is unsuitable for the client's retirement income needs. What is the fiduciary obligation?
- Recommend replacing it with a more suitable product even if the commission is lower (Correct answer)
- Maintain the annuity to avoid disrupting the client's existing plan
- Disclose the commission difference only if the client asks
- Defer to the insurance company's recommendation
Correct answer: Recommend replacing it with a more suitable product even if the commission is lower
The fiduciary duty requires putting the client's interests first, including recommending products that better serve retirement needs even at lower compensation.
Question 2: Under the NACADA Code of Ethics, which action best demonstrates the duty of loyalty to a retirement planning client?
- Sharing client data with affiliated firms that may offer additional services
- Avoiding any action that benefits the advisor at the client's expense (Correct answer)
- Recommending products from preferred vendors to streamline the planning process
- Limiting advice to areas where the advisor earns compensation
Correct answer: Avoiding any action that benefits the advisor at the client's expense
The duty of loyalty requires that the advisor place the client's interests above their own and avoid self-dealing.
Question 3: A retirement planner recommends a variable annuity to a 72-year-old client with a 10-year surrender period primarily because it offers a guaranteed lifetime income rider. What ethical concern is raised?
- Variable annuities are prohibited for clients over 70
- The surrender period may outlast the client's realistic planning horizon (Correct answer)
- Guaranteed income riders are always unsuitable for retirees
- The recommendation is sound if the client can afford the premium
Correct answer: The surrender period may outlast the client's realistic planning horizon
A 10-year surrender period on a variable annuity for a 72-year-old raises suitability concerns since the client may need liquidity before the surrender period ends.
Question 4: Which of the following represents a violation of the confidentiality duty owed by a CRPC designee?
- Sharing client information with a regulatory authority pursuant to a lawful subpoena
- Discussing general retirement planning concepts in a public seminar
- Disclosing a client's account balances to the client's adult child without written authorization (Correct answer)
- Reporting suspected elder financial abuse to adult protective services
Correct answer: Disclosing a client's account balances to the client's adult child without written authorization
Disclosing a client's financial information to a third party, including family members, without proper written authorization violates the duty of confidentiality.
Question 5: A CRPC designee provides retirement planning services and also sells insurance products. Which practice best manages the resulting conflict of interest?
- Separating the two businesses under different entity names
- Disclosing the dual role and compensation structure fully in writing before providing recommendations (Correct answer)
- Only recommending insurance products when the client specifically requests them
- Obtaining verbal consent from the client before each insurance sale
Correct answer: Disclosing the dual role and compensation structure fully in writing before providing recommendations
Full written disclosure of the dual role and how compensation is earned allows the client to make an informed decision about the advice they receive.
Question 6: What does the 'prudent investor' standard require of a fiduciary managing retirement assets?
- Selecting only government-guaranteed investments to eliminate all risk
- Investing with the care, skill, and diligence of a knowledgeable person managing similar assets (Correct answer)
- Achieving a minimum benchmark return regardless of market conditions
- Following the client's explicit instructions even when they are imprudent
Correct answer: Investing with the care, skill, and diligence of a knowledgeable person managing similar assets
The prudent investor rule requires fiduciaries to act with the skill and diligence that a knowledgeable investor would use, considering risk and return objectives.
Question 7: A client asks a CRPC designee to recommend a specific mutual fund that the designee knows is underperforming relative to its peers. What is the ethical course of action?
- Recommend the fund because the client requested it and has final decision authority
- Recommend a more suitable fund and explain the performance data to the client (Correct answer)
- Decline to make any recommendation and refer the client to another advisor
- Recommend the fund only if the client signs a waiver acknowledging the underperformance
Correct answer: Recommend a more suitable fund and explain the performance data to the client
The fiduciary duty requires recommending suitable options and providing accurate information so the client can make an informed decision.
CRPC Ethical and Fiduciary Duties 2
A CRPC designee discovers that a client's current annuity generates high commissions but is unsuitable for the client's retirement income needs.
What is the fiduciary obligation?