CIC - Certified Investment Counselor Fiduciary Duty and Responsibilities Questions and Answers

Question 1

A Certified Investment Counselor (CIC) is managing a portfolio for a new client. The counselor's firm has a proprietary mutual fund that has historically underperformed its benchmark, but generates higher fees for the firm than other available options. Recommending this fund to the client would primarily be a breach of which fiduciary duty?

Accepted Answer

The duty of loyalty

Answer

The duty of loyalty requires an investment adviser to put their client's interests first and not favor their own interests over those of a client. Recommending a high-fee, underperforming proprietary fund to generate more revenue for the firm is a classic example of a conflict of interest and a breach of the duty of loyalty, as the client's best interest is subordinated to the counselor's and the firm's financial gain.

Question 2

Under the Investment Advisers Act of 1940, the fiduciary duty owed by an investment adviser to a client is comprised of which two primary components?

Accepted Answer

Duty of Care and Duty of Loyalty

Answer

The U.S. Securities and Exchange Commission (SEC) has consistently interpreted the fiduciary duty under the Investment Advisers Act of 1940 as being composed of the duty of care and the duty of loyalty. The duty of care involves providing suitable advice and best execution, while the duty of loyalty requires the adviser to place the client's interests ahead of their own.

Question 3

A CIC is advising a client on their retirement portfolio. The counselor performs a thorough analysis of the client's risk tolerance, time horizon, and financial goals. Based on this, the counselor constructs a well-diversified portfolio using low-cost index funds and monitors it regularly. This approach is a clear demonstration of adherence to which of the following principles?

Accepted Answer

The prudent investor rule

Answer

The prudent investor rule requires a fiduciary to manage a portfolio by considering the portfolio as a whole and as part of an overall investment strategy. This includes evaluating the client's risk tolerance and goals, diversifying investments to avoid uncompensated risk, and monitoring the portfolio. The counselor's actions align directly with these core tenets.

Question 4

Which of the following actions would be considered a violation of a Certified Investment Counselor's fiduciary duty of care?

Accepted Answer

Failing to conduct due diligence on a complex investment product before recommending it.

Answer

The duty of care requires an adviser to have a reasonable basis for their investment advice. This includes conducting a reasonable investigation into an investment to ensure it is in the client's best interest and that the advice is not based on materially inaccurate or incomplete information. Failing to perform this due diligence is a direct breach of the duty of care.

Question 5

A CIC discovers a highly attractive, but limited, investment opportunity. The counselor has several clients for whom the investment would be suitable. To comply with the fiduciary duty of loyalty, what is the MOST appropriate course of action?

Accepted Answer

Allocate the investment pro-rata among all suitable clients in a fair and equitable manner.

Answer

The duty of loyalty requires that an adviser must not unfairly favor one client over another. When dealing with limited opportunities suitable for multiple clients, the fiduciary must have a fair and equitable method for allocation. A pro-rata allocation is a common and accepted method to ensure clients are treated fairly.

(CIC) Certified Investment Counselor Practice Test

(CIC) Certified Investment Counselor Practice Test

CIC - Certified Investment Counselor Fiduciary Duty and Responsibilities Questions and Answers