2.1 - Professionalism and fiduciary responsibilities

Question 1

List the major participants within the investment industry

LO 2.1.1

Answer 1

asset owners, asset managers, consultants, brokers, investment banks, service providers, and regulators.

Question 2

List the four parts that the purpose of the investment industry can be broken up into

LO 2.1.1

Answer 2

1. Intrinsic - matching savers with spenders
2. Core - portfolio management. Picking the most appropriate investments to generate optimal returns over the long term within acceptable risk levels
3. Fundamental - to enhance overall societal wealth and well-being
4. Collateral - looks to provide opportunities for employment as well as investment firm growth.

Question 3

Describe how the investment industry is characterized by path dependency

LO 2.1.1

Answer 3

The current system has evolved from changes that occurred in the past, and the current system determines the types of changes that will occur in the future

Question 4

List and describe the different forms of value creation

LO 2.1.2

Answer 4

Wealth and risk management is the main form of value creation. These activities occur most frequently during portfolio creation and portfolio management.
Stewardship is another important form of value creation, which focuses on improving societal wealth and well-being.

Question 5

What is the key idea behind sustainable finance

LO 2.1.2

Answer 5

The main idea behind sustainable finance is to satisfy current needs, but in doing so, not jeopardize the interests of future stakeholders. Financial professionals frequently rank profit for clients and investors as the primary goal
(more traditional), but additional potential goals include improved organizational and/or societal well-being (more focused on sustainability).

Question 6

Describe the system-value perspective

LO 2.1.2

Answer 6

The system-value perspective
views the investment industry and society as being integrated—and, therefore, they must be evaluated together. Value creation involves maximizing both shareholder value and welfare.

Question 7

List the four areas Fiduciary obligations typically cover

LO 2.1.3

Answer 7

1. Loyalty - beneficiearies always come first and there should be no conflicts of interest
2. Prudence and care - perform duties with sufficient care and judgment to the level of a prudent individual.
3. Diversification - achieve sufficient diversification consistent with modern portfolio theory and accepted industry practice.
4. Impartiality - ensure that the investment professional does not favor ny client/beneficiary over another

Question 8

Describe the challenges involving fiduciary duty in the investment industry

2.1.3

Answer 8

One challenge involving fiduciary duty is that the exact application of each fiduciary obligation area is problematic, because there will likely be multiple valid approaches. The definition of fiduciary duty naturally changes as investment theory and practice change over time. Furthermore, there is no universal definition of exactly what fiduciary duty involves. The four elements of fiduciary duty essentially cover the concept of professionalism in the investment industry. Additionally, in the context of making investment decisions, these areas require the fiduciary to consider not only client needs, but also the needs of society.

Question 9

List five specific values to consider within the professional mindset

LO 2.1.3

Answer 9

1. Ethical and professional behavior
2. Partnership
3. Client first
4. Transparency, integrity and accountability
5. Public responsibility and a clean license to operate.

Question 10

List the three general instances to consider when the “right choice” is not obvious”

LO 2.1.3

Answer 10

1. Conflicts of interest
2. Tradeoff between benefits and costs
3. Insufficient knowledge of the client

Question 11

List the three main ways culture impacts a group

LO 2.1.3

Answer 11

1. Integration of values and beliefs, setting expectations, creating trust, and providing a greater amount of certainty
2. Focuing on the most important issues to the group
3. Capitalizing on effective communication and engagement (both internally and externally)

Question 12

What does gaining a client’s trust require?

LO 2.1.4

Answer 12

• Credibility. The asset manager is licensed and qualified to provide the service and has met all relevant regulatory requirements. Additionally, there is a history of success that warrants the client placing trust in the asset manager.
• Communication. The asset manager communicates with clients on a timely and thorough basis, using relevant technology where applicable.
• Professionalism. The asset manager has the ability to deliver the service at the appropriate skill level together with loyalty, care, and prudence.

Question 13

List the three entities to consider regarding the virtuous circle of positive forces

LO 2.1.4

Answer 13

1. The portfolio benefits from managers who have expertise, which improves the chances of achieving performance objectives.
2. The client earns outstanding returns, which enhances the trust in the asset manager and leads to a stronger and more stable manager-client relationship.
3. The asset manager earns greater fees and incentives from the client given outstanding investment performance.