Financial Advisor Client Relations and Practice Management

Question 1

Which document formally establishes the scope of services, fee structure, and responsibilities between a financial advisor and client?

Accepted Answer

Client Advisory Agreement

Answer

A Client Advisory Agreement is the legal contract that defines the advisory relationship, including services provided, fees, termination terms, and each party's responsibilities.

Question 2

What is the primary purpose of an Investment Policy Statement (IPS)?

Accepted Answer

To document a client's investment objectives, constraints, and guidelines for managing their portfolio

Answer

An IPS provides a written framework for investment decisions, documenting client goals, risk tolerance, time horizon, liquidity needs, and return objectives.

Question 3

When gathering client data through a 'Know Your Customer' (KYC) process, a financial advisor should collect information about all of the following EXCEPT:

Accepted Answer

Specific stock picks the client's friend recommends

Answer

KYC information focuses on the client's own financial situation, goals, and risk profile—not third-party stock tips, which are irrelevant to establishing a suitability profile.

Question 4

Which behavioral finance concept explains why clients feel the pain of losses more intensely than the pleasure of equivalent gains?

Accepted Answer

Loss aversion

Answer

Loss aversion, identified by Kahneman and Tversky, describes the tendency for people to feel losses approximately twice as intensely as equivalent gains.

Question 5

A financial advisor who charges a percentage of assets under management (AUM) is using which fee model?

Accepted Answer

Fee-only AUM-based

Answer

An AUM-based fee model charges clients a percentage of their managed assets, aligning the adviser's compensation with portfolio growth.

Financial Advisor Practice Test

Financial Advisor Practice Test

Financial Advisor Client Relations and Practice Management