Investment Advisor Fiduciary Duty and Ethics 2 — Questions and Answers
Question 1: The 'duty of care' component of fiduciary responsibility requires an investment adviser to:
- Guarantee portfolio returns
- Make only recommendations suitable for the client's specific situation (Correct answer)
- Avoid all equity investments
- Charge the lowest possible fees
Correct answer: Make only recommendations suitable for the client's specific situation
The duty of care requires advisers to understand each client's financial situation and make recommendations that are genuinely suitable for that client.
Question 2: Which practice violates an investment adviser's ethical obligations?
- Charging a transparent management fee
- Churning a client's account to generate commissions (Correct answer)
- Rebalancing a portfolio annually
- Disclosing all fees in the ADV brochure
Correct answer: Churning a client's account to generate commissions
Churning — excessive trading to generate commissions — violates the adviser's duty of loyalty and care by prioritizing adviser income over client interests.
Question 3: When an investment adviser has a personal financial interest in a security they recommend to clients, they must:
- Avoid recommending that security entirely
- Disclose the personal interest before making the recommendation (Correct answer)
- Only recommend it to institutional clients
- Report it only to FINRA
Correct answer: Disclose the personal interest before making the recommendation
Advisers must disclose any personal financial interest in securities they recommend so clients can assess potential bias.
Question 4: Under the NASAA Model Rule, which unethical practice involves an adviser making false or misleading statements about a security?
- Suitability violation
- Misrepresentation (Correct answer)
- Excessive trading
- Unauthorized trading
Correct answer: Misrepresentation
Misrepresentation involves making false or misleading statements about securities and is explicitly prohibited under state and federal adviser regulations.
Question 5: An adviser who makes trades in client accounts without authorization is committing what violation?
- Front-running
- Unauthorized trading (Correct answer)
- Excessive trading
- Best execution failure
Correct answer: Unauthorized trading
Unauthorized trading occurs when an adviser executes trades in client accounts without obtaining proper client authorization.
Question 6: An adviser learns that a client is being defrauded by another party. Ethical standards suggest the adviser should:
- Do nothing unless directly asked
- Notify the client and recommend appropriate action (Correct answer)
- Profit from the information
- Report it only after the fraud is complete
Correct answer: Notify the client and recommend appropriate action
An adviser's duty of loyalty and care includes protecting clients from known harm, requiring notification and guidance when fraud is discovered.
Investment Advisor Fiduciary Duty and Ethics 2
The 'duty of care' component of fiduciary responsibility requires an investment adviser to: