1. Fiduciary Duties Flashcards
Give some examples of where fiduciary relationships might occur
Agent and principal Director and company Lawyer and client Banker and customer Stockbroker and client Trustee and beneficiaries
What is a fiduciary relationship?
One in which one person places special trust, confidence and reliance in, and is influenced by, another who has a fiduciary duty to act for the benefit of that person.
Name some examples of how an advisor can work in the client’s best interest.
Advising the client with sufficient information
Selecting suitable investments to meet the client’s needs
Undertake transactions for the client
Putting interests of the client first
What is the RDR?
The Retail Distribution Review
How do investment firms have to clearly describe their services?
Independent advice
Or
Restricted advice
Describe what a firm means by ‘independent advise’
Firms that make their recommendations based on comprehensive and fair analysis, and provide unbiased, unrestricted advice.
Describe what a firm offering ‘restricted advice’offers
A firm that gives restricted advice, i.e. Gives advice only on its own range of products, or on a limited range.
Give some examples of the sort of information that must be provided to a client when advising in a fiduciary relationship.
- The firm’s and its services
- Investments and proposed investment strategies (including risk guidance)
- Any leverage that is involved, and its effects and the risk of losing the entire investment
- Volatility of the price & any limitations on the available market for such investments
- Where the client has entered into derivative-type transactions, the fact that they might assume obligations additional to the cost of acquiring the investments
- Any margin requirements or similar obligations applicable to certain investments
- The execution venue that will be used
- All costs and associated charges
Name some examples of the scenarios in which disclosure of information may occur.
Financial planning reports
Suitability reports
Key investor information documents
Simplified prospectuses for a mutual fund
What is a conflict of interest?
Where someone in a fiduciary position has personal or professional interests that compete with their duty to act in the client’s best interest.
What is the MiFID?
The Markets in Financial Instruments Directive
What does the MiFID do?
It lays down the rules as to how client categorisation should be applied and identifies three types of client:
- Retail
- Professional
- Eligible counterparty
What is ‘know your customer’
The act of gathering sufficient information about the customer
What types of information should be gathered from a potential customer seeking financial advise?
Personal details: name, address, age, health, family & dependants
Financial details: income, outgoings, assets, liabilities, insurance & protection arrangements
Objectives: growth, protecting real value of capital, generating income, protecting against future events
Risk tolerance: cautious, balanced, adventurous
Liquidity and time horizons: immediate needs, known future liabilities, need for an emergency reserve
Tax status: income, capital gains, inheritance taxes, available allowances
Investment preferences: restrictions, ethical considerations
What other information should be gathered in order to ensure that any recommendations made are suitable and appropriate for the client?
- A client’s knowledge & experience in relation to the investment or service that will be considered for recommendation
- The level of investment risk that the client can bear financially and whether that is consistent with their investment objectives
