3.5) Investment Analysis, Recommendations and Actions V (B): Communication with Existing and Prospective Clients

Question 1

What is substandard 5(B) to investment analysis, recommendations and actions?

Answer 1

Communication with Existing and Prospective Clients

Question 2

How is communication with existing and prospective clients mean to be performed? (3)

Answer 2

• Disclose to clients the format and general principles of the investment processes used to analyse investments, select securities, and construct portfolios.
• Promptly disclose any changes that might materially affect those processes.
• Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Question 3

How is communication with existing clients implemented for members? (4)

Answer 3

• Disclose to clients the basic outline of investment process used. Inform clients immediately of any material changes when they do occur.
• Clearly distinguish between fact and opinion.
• Clearly disclose all relevant info and factors to clients (limitations, risks etc.)
• Ensure clients understand basic characteristics of relevant investments

Question 4

What are the recommended practice for members to perform communication with existing and prospective clients?

Answer 4

Selection of relevant factors in a report can be a judgment call so maintain records indicating nature of research and be able to supply additional info if requested by a client.

Question 5

Example 41: Dlamini is a quantitative fund manager at Quantum Analytics. She is preparing a presentation on her fund’s performance for a quarterly session with
one of her clients. Believing that her investment process is too complex for this client to understand, she decides to omit any explanation of this from her slides.
Is Dlamini in compliance with Standard V(B)?

Answer 5

Solution: Standard V(B) means that she need not go into great detail, but her clients should at least have a basic understanding of the investment basis, as this
is a prerequisite for them appreciating some of its limitations and risks. Hence omitting this info from her slides is a violation of Standard V(B).

Question 6

Example 42: Wiseman has done research that has led him to conclude that Liquid Gold probably has oil reserves that will last another 9 years. In his latest
research report, he therefore writes: “As Liquid Gold has oil reserves that will last for another 9 years while the market is only discounting 5 years of reserves, we recommend this stock as a good investment.” Has Wiseman transgressed standard V(B)?

Answer 6

Solution: Wiseman is in contravention of Standard V(B), as his report implies that it is a fact that Liquid Gold has 9 years of oil reserves, whereas this is just his opinion.

Question 7

Example 43: C&C is an investment house that specialises in small cap shares. C&C has in recent years attracted a large amount of funds, and is now so big that
it is no longer possible to find enough investment opportunities in small cap shares only. The Chief Investment Officer (CIO) of C&C has therefore decided to
change the company’s investment procedures and to also allow for investment in mid cap stocks. All marketing material is modified accordingly. Is C&C in compliance with Standard V(B)?

Answer 7

Solution: While it is correct to inform prospective and future clients of C&C’s new philosophy through updated marketing materials, C&C is in breach of
Standard V(B), as it has not communicated the change to existing clients. It is conceivable that some of these clients may have funds invested with C&C specifically to obtain exposure to small cap stocks, and may therefore have a very direct interest in the change.