Ch 6 Investment Advisory Practices

Question 1

True or False: An agent must always have reasonable grounds for recommending a particular security.

Answer 1

True

Question 2

Define wrap account.

Answer 2

A managed account that charges clients an annual fee to cover trading, research, and advisory services

Question 3

What is soft-dollar compensation?

Answer 3

Non cash compensation paid by a BD to an IA for directing securities transactions.

Question 4

True or False: A fiduciary’s duty includes ensuring that all investment advice is impartial and disinterested.

Answer 4

True

Question 5

True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.

Answer 5

False. Risk should be managed, not avoided. Speculative investments (e.g., options and commodities) may reduce overall risk.

Question 6

IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s ___________ responsibility.

Answer 6

fiduciary responsibility.

Question 7

What duties does an IAR have according to the “know your customer” rules?

Answer 7

Make a reasonable inquiry into a customer’s background and provide suitable advice based on known information.

Question 8

True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.

Answer 8

True

Question 9

True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.

Answer 9

False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.

Question 10

What forms of soft-dollar compensation are acceptable?

Answer 10

Research reports, seminars, software used to provide analysis

Question 11

List some examples of fiduciaries.

Answer 11

IARs, executors of estates, custodians of UTMA/UGMA accounts, trustees, and pension plan administrators

Question 12

True or False: A mutual fund asset allocation program requires a special wrap program disclosure document.

Answer 12

False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds.

Question 13

What are some of the examples of items that cannot be covered by a soft-dollar arrangement?

Answer 13

Advertising, travel expense reimbursement, meals and entertainment, and computers

Question 14

Identify the acronym: UPIA

Answer 14

Uniform Prudent Investor Act

Question 15

In what type of account is reverse churning most likely found?

Answer 15

A fee-based (wrap) account

Question 16

To be allowed, a soft-dollar arrangement must benefit ____________.

Answer 16

client.

Question 17

Identify some permissible uses of soft-dollar arrangements.

Answer 17

Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.

Question 18

May an IAR recommend that a client meet/speak with another financial professional?

Answer 18

Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it is acceptable to recommend outside assistance.

Question 19

Describe a soft-dollar arrangement between an IA and a BD.

Answer 19

An IA directs client transactions to a specific BD in return for research and brokerage services.

Question 20

Is office furniture (e.g., a desk chair) included in an IA’s net worth?

Answer 20

Yes, provided it is fully owned by the IA.

Question 21

True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.

Answer 21

False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.

Question 22

Define fiduciary.

Answer 22

A person who acts on behalf of another, which gives rise to a relationship of trust and confidence.

Question 23

What is not pertinent when opening an account, a client’s educational or financial background?

Answer 23

Educational background

Question 24

What forms of soft-dollar compensation are NOT acceptable?

Answer 24

Rent, travel expense reimbursement, hardware, furniture, entertainment, meals

Question 25

What document is required for an IAR to be authorized to pay his client’s bills?

Answer 25

A full power of attorney

Question 26

If a client gives little information when opening an account, what securities may an agent recommend to the client?

Answer 26

Only securities that are suitable based on the information the client did provide

Question 27

In what type of arrangement may an IA acquire research reports without paying for them directly?

Answer 27

In a soft dollar arrangement, an IA may acquire research reports without directly paying the BD.