WMS Ethical Standards & Professional Conduct 3 — Questions and Answers
Question 1: A wealth manager receives material non-public information about a merger from a client who is an executive at a public company. What must the advisor do?
- Trade on behalf of the client since the client is the source of the information
- Erect an information barrier and refrain from trading on or sharing the information (Correct answer)
- Report the information to other clients who hold shares in the company
- Immediately liquidate all positions in the company across all client accounts
Correct answer: Erect an information barrier and refrain from trading on or sharing the information
Using or sharing material non-public information constitutes insider trading; advisors must establish information barriers and not act on such information.
Question 2: The concept of 'informed consent' in wealth management primarily means:
- The client signs all required regulatory documents before account opening
- The client understands and agrees to the risks, costs, and nature of recommended strategies before proceeding (Correct answer)
- The advisor documents that the client has read all product prospectuses
- The compliance department has reviewed all client communications
Correct answer: The client understands and agrees to the risks, costs, and nature of recommended strategies before proceeding
Informed consent requires that clients genuinely understand the material facts, risks, and costs involved in a recommendation before they agree to it.
Question 3: A WMS professional manages both a charitable foundation and a private client who both want to purchase shares of a thinly traded stock. How should the advisor handle this order allocation?
- Give priority to the client with the longer tenure
- Alternate priority randomly between accounts each time such conflicts arise
- Use a fair and consistent allocation policy disclosed to all clients in advance (Correct answer)
- Give priority to the larger account by assets under management
Correct answer: Use a fair and consistent allocation policy disclosed to all clients in advance
Fair allocation policies must be pre-established, consistently applied, and disclosed to clients to avoid favoritism and conflicts of interest.
Question 4: Which of the following is the primary purpose of a wealth manager maintaining detailed client records?
- To satisfy regulatory requirements only
- To support marketing and client acquisition efforts
- To demonstrate the basis for advice given and protect both client and advisor interests (Correct answer)
- To enable the firm to charge higher advisory fees
Correct answer: To demonstrate the basis for advice given and protect both client and advisor interests
Detailed records document the rationale for recommendations, enabling the advisor to demonstrate they acted appropriately and in the client's best interest if questions arise.
Question 5: A wealth manager is asked to serve on the board of a local company whose stock some clients hold. What ethical step is essential before accepting?
- Notify all affected clients immediately after joining the board
- Obtain approval from the firm and assess whether the role creates a material conflict of interest (Correct answer)
- Refuse all board positions to avoid any appearance of conflict
- Accept the position since community involvement is encouraged
Correct answer: Obtain approval from the firm and assess whether the role creates a material conflict of interest
Serving on a corporate board creates potential conflicts of interest; advisors must obtain firm approval and manage any conflicts through disclosure or recusal from related decisions.
Question 6: Which ethical obligation requires a wealth manager to maintain client information confidential even after the client relationship ends?
- Duty of care
- Duty of confidentiality (Correct answer)
- Duty of loyalty
- Duty of competence
Correct answer: Duty of confidentiality
The duty of confidentiality extends beyond the active client relationship, prohibiting disclosure of client information without consent or legal compulsion even after termination.
Question 7: When presenting investment performance to clients, a WMS professional is ethically obligated to:
- Present only the best-performing periods to maintain client confidence
- Use composite performance that excludes underperforming accounts
- Present performance accurately, including relevant benchmarks and full disclosure of fees (Correct answer)
- Show gross returns since net returns are difficult to calculate precisely
Correct answer: Present performance accurately, including relevant benchmarks and full disclosure of fees
Ethical performance presentation requires accurate, complete disclosure including fees and benchmarks so clients can fairly evaluate the advisor's contribution.
WMS Ethical Standards & Professional Conduct 3
A wealth manager receives material non-public information about a merger from a client who is an executive at a public company.
What must the advisor do?