Client Suitability & Fiduciary Duty Flashcards

An adviser who receives a referral fee from a third party for recommending a client must:

Answer: Disclose the fee arrangement to the referred client

Third-party compensation arrangements, including referral fees, must be disclosed to clients as material conflicts of interest.

Which of the following represents the correct application of the duty of care?

Answer: Tailoring investment advice based on each client's unique circumstances and goals

The duty of care requires individualized advice based on each client's unique circumstances, objectives, and risk profile.

When an investment adviser discovers an error in a client's account, the fiduciary duty requires:

Answer: Promptly correcting the error and notifying the client

Fiduciary duty requires prompt correction of errors and transparent communication with clients about mistakes in their accounts.

The concept of 'informed consent' in the fiduciary context means:

Answer: Client understands and agrees after receiving full disclosure of all material facts and conflicts

Informed consent requires that clients have received and understood sufficient disclosure about conflicts and other material facts before agreeing.

An adviser recommends liquidating a client's portfolio to reinvest in the adviser's new fund primarily because the adviser earns higher fees. This is an example of:

Answer: Breach of fiduciary duty

Recommending transactions primarily to benefit the adviser financially, not the client, is a breach of the fiduciary duty of loyalty.

A client instructs an adviser to concentrate their entire portfolio in a single stock. The adviser's obligation is to:

Answer: Inform the client of the risks while documenting the client's instruction, then follow it if the client insists

Advisers should counsel clients about risk concentration but must ultimately follow lawful client instructions while documenting them.