Ch. 6 Flashcards
T/F: Under the Uniform Prudent Investor Act (UPIA), an IAs main objective should be risk avoidance.
F; the UPIA indicates that advisers are responsible for managing risk, not avoiding risk
What document is required for an IAR to be authorized to pay his clients bills?
A full power of attorney
What is not pertinent when opening an account, a clients educational or financial background?
Educational background
What forms of soft dollar compensation are acceptable?
Research reports, seminars, software used to provide analysis
Describe a soft dollar arrangement between an IA and a BD.
An IA directs client transactions to a specific BD in return for research and brokerage services.
T/F: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.
F; Risk should be managed, not avoided. Speculative investments (like options and commodities) may reduce overall risk
Is office furniture (desk chair) included in an IAs net worth?
Yes, provided it is fully owned by the IA
If a client gives little information when opening an account, what securities may an agent recommend to the client?
Only securities that are suitable based on the information the client did provide
T/F: If a conflict of interest exists, an IA must always terminate a relationship with a client.
F; An IA must always disclose a conflict, but they don’t necessarily need to end the relationship
May an IAR recommend that a client meet/speak with another financial professional?
Yes. If an IAR lacks expertise in a certain area (insurance), it is acceptable to recommend outside assistance.
In what type of arrangement may an IA acquire research reports without paying for them directly?
In a soft dollar arrangement, an IA may acquire research reports without directly paying the BD.
To be allowed, a soft dollar arrangement must benefit ___________.
The client
Define wrap account.
A manager account that charges clients an annual fee to cover trading, research, and advisory services
What is soft dollar compensation?
Non cash compensation paid by a BD to an IA for directing securities transactions.
Identify the acronym: UPIA
Uniform Prudent Investor Act
What are some of the examples of items that cannot be covered by a soft dollar arrangement?
Advertising, travel expense reimbursement, meals and entertainment, and computers
Define fiduciary.
A person who acts on behalf of another, which gives rise to a relationship of trust and confidence
T/F: A mutual fund asset allocation program requires a special wrap program disclosure document.
F; these programs charge a percentage of assets to manage a portfolio of no load mutual funds
T/F: An agent must always have reasonable grounds for recommending a particular security.
T
List some examples of fiduciaries.
IARs, executors of estates, custodians of UTMA/UGMA accounts, trustees, and pension plan administrators
In what type of account is reverse churning most likely found?
A fee based (wrap) account
IAs have greater responsibility to their clients than BDs. This is referred to as the IAs _________ responsibility.
Fiduciary
T/F: A fiduciary’s duty includes ensuring that all investment advice is impartial and disinterested.
T
T/F: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.
T
What duties does an IAR have according to the “know your customer” rules?
Make a reasonable inquiry into a customers background and provide suitable advice based on known information
What forms of soft dollar compensation are NOT acceptable?
Rent, travel expense reimbursement, hardware, furniture, entertainment, meals
Identify some permissible uses of soft dollar arrangements.
Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars
