CRPC Ethical and Fiduciary Duties 5 — Questions and Answers
Question 1: A CRPC designee who is also a registered investment adviser receives soft dollar benefits (research services) from a broker in exchange for directing client trades to that broker. What must the advisor do?
- Discontinue the arrangement immediately as soft dollars are prohibited
- Disclose the soft dollar arrangement to clients so they can evaluate the potential conflict (Correct answer)
- Accept the arrangement without disclosure if the research benefits clients indirectly
- Report the arrangement only to the SEC, not to individual clients
Correct answer: Disclose the soft dollar arrangement to clients so they can evaluate the potential conflict
Soft dollar arrangements create conflicts of interest that require full disclosure to clients under fiduciary and SEC requirements.
Question 2: Which ethical principle requires a retirement planner to provide complete, accurate, and timely information to clients?
- Duty of loyalty
- Duty of full and fair disclosure (Correct answer)
- Duty of objectivity
- Duty of diligence
Correct answer: Duty of full and fair disclosure
The duty of full and fair disclosure obligates advisors to provide clients with all information material to their decisions, accurately and in a timely manner.
Question 3: A retirement advisor simultaneously serves as the trustee of a client's retirement trust and as the investment advisor. What ethical issue does this dual role create?
- No issue exists as long as the advisor charges the same fee for both roles
- A potential conflict of interest requiring disclosure and possibly independent oversight (Correct answer)
- A prohibited arrangement under all circumstances
- An arrangement that eliminates fiduciary liability for the advisor
Correct answer: A potential conflict of interest requiring disclosure and possibly independent oversight
Serving as both trustee and investment advisor creates a conflict because the advisor makes decisions they also oversee, requiring disclosure and often independent review.
Question 4: Under the CRPC code of ethics, what is the appropriate handling of a client gift worth $200 offered after a successful retirement planning engagement?
- Accept it freely as a token of appreciation with no ethical concerns
- Evaluate whether the gift creates a sense of obligation and disclose or decline per firm policy (Correct answer)
- Accept only gifts under $100 as a universal bright-line rule
- Decline all gifts regardless of value as they are always prohibited
Correct answer: Evaluate whether the gift creates a sense of obligation and disclose or decline per firm policy
Gifts must be evaluated for whether they create conflicts or obligations; advisors should follow firm policies and disclosure requirements rather than a universal dollar threshold.
Question 5: A CRPC designee is aware that a product recommended to a client has a known defect that may affect performance. What is the ethical obligation?
- Proceed with the recommendation since the defect may not materialize
- Disclose the known defect to the client before finalizing the recommendation (Correct answer)
- Replace the product with a similar one without informing the client of the original defect
- Wait for the product provider to issue an official advisory before disclosing
Correct answer: Disclose the known defect to the client before finalizing the recommendation
Material information about known product defects must be disclosed promptly so the client can make a fully informed decision.
Question 6: A retirement planner's recommendation to delay Social Security benefits until age 70 benefits the client but reduces the advisor's AUM-based fee because the client needs to draw from managed assets in the interim. What should the advisor do?
- Recommend the strategy that maximizes AUM to sustain the advisory relationship
- Recommend delaying Social Security if it is in the client's best interest, despite the fee impact (Correct answer)
- Ask the client to choose between the two strategies without providing a recommendation
- Disclose the fee conflict only if the client directly asks about compensation
Correct answer: Recommend delaying Social Security if it is in the client's best interest, despite the fee impact
Fiduciary duty requires recommending the strategy that best serves the client's retirement income, even when it reduces the advisor's compensation.
Question 7: Which of the following best describes the concept of 'material conflict of interest' in the context of CRPC ethical standards?
- Any disagreement between the advisor and client about investment strategy
- A personal or financial interest that could reasonably influence the advisor's recommendations (Correct answer)
- A conflict that has already caused demonstrable harm to a client
- Compensation arrangements involving variable commissions
Correct answer: A personal or financial interest that could reasonably influence the advisor's recommendations
A material conflict of interest is any personal or financial interest that could reasonably — even if it does not actually — affect the objectivity of the advisor's recommendations.
CRPC Ethical and Fiduciary Duties 5
A CRPC designee who is also a registered investment adviser receives soft dollar benefits (research services) from a broker in exchange for directing client trades to that broker.
What must the advisor do?