Chapter 1 Flashcards
A mutual fund definition
A mutual fund pools the money other investors. the money in the pool is invested in a variety of products depending on the type of mutual fund for instance, a bond fund invest in a wide Variety of bonds; a real estate fund invests in real estate; an equity fund invests in the shares of companies listed on the stock exchange.
- each investor in the mutual fund receives units or shares in the fund in proportion to his or her investment and in turn receives income, dividends or capital gains, also proportionately
- investors also pay the expense of running the fund. This cost is an annual charge that is a percentage assigned by fund managers. It is called the management expense ratio or MER
- Mutual funds can be bought only through a financial institution such as a bank or a fund company such as McKenzie financial
- only licensed sales representatives my sell mutual funds to investors
- A selection of securities owned by an investment company or an individual investor is called a portfolio
Open Ended and Closed Ended Funds
Most mutual funds today are open ended. This means their units can be acquired or sold at anytime.
* Closed end funds, in which shares are issued instead of units are another kind of fund. these funds trade on stock exchanges and are not always available for purchase
The three responsibilities of a mutual fund sales person are:
A legal responsibility: ensure that the client buys mutual funds that are suitable to the customers needs, objectives, and goals, financial and personal circumstances, investment knowledge, and tolerance for risk.
ethical responsibility: put the clients needs first
professional responsibility: to provide the best client service
Ethical conduct
It’s a requirement for mutual fund sales people. Evidence of ethical conduct is provided by sales person
- who follows the rules
- who’s moral principles address the spirit of ethical conduct or behavior; what is right or wrong is determined by the person moral compass
Fiduciary duty
A fiduciary relationship exists with a client relies on the advice of the sales person. Fiduciary duty put clients interests first at all times and in all circumstances.
Know your client (KYC)
Do you know your client rule requires you to:
- act carefully, honestly, and in good faith
- disclose all facts that are relevant to the investment decision
- provide suitable recommendations to every client for every order
Suitability of recommendations
Suitability of recommendations is paramount to the ethical responsibility of the sales person it is based on:
- recommendations suitable for the clients personal and financial circumstances and investing objectives
- and understanding of the products, so that sales person can associate client need with the best product. Knowing your product means understanding the rest of the funds, charges, and type of returned the fund provides
The suitability duty requires that the representative apply due diligence to each account the client holds, to assess the suitability of the investments in the account, and that this extends through the life of the account and is reapplied whenever a material change of any sort occurs in the know your client information or when the responsible representative on the client account changes
MFDA: Mutual funds dealers Association
MFDA rules and policies demand that mutual fund dealers and their representatives maintain timely and sufficient records of any orders or any instructions regarding mutual funds whether the purchases or sales are completed or not
Policy number 2 minimum standards for account supervision:
Supervisors, branch managers and or branch compliance officers who are responsible for oversight of a dealing representative must review the investments in the accounts of clients and keep the same record as the representative does for his or her reviews
Knowing your client means knowing the clients:
Financial goals and objectives: what is the target the client is aiming for four example to retire at 60 with $60,000 per year as retirement income?
Financial circumstances: how much can the client invest and risk for example the clients investment portfolio and the yearly income generated by this portfolio, the security of the clients employment income, the clients monthly cost of living etc.
Personal circumstances: how much is available to invest for example whether or not the client has dependence, the type of lifestyle the client wishes to maintain, The age of the client etc.
Investment knowledge: does the client understand the risk of investing
The ability to tolerate risk: what is the risk tolerance of the client? For example a client may be young and highly tolerant of risk because there are many years before the money is needed, or older and very cautious and therefore risk averse
Knowing your client part two. What does this mean?
Number one: when you know your client you can judge if the mutual fund is suitable for the client from the risk associated with the front and it’s potential returns
Number two: the resulting knowledge of the client allows the representative to judge the facts and circumstances of an order and that’s evaluate suitability
Number three: it is legally require that clients find mutual funds supply know your client information before a purchase this must occur for all accounts
Number four: to facilitate this some order forms include and know your clients action or a separate document maybe used
Number five: a clients refusal to supply know your client data means that no transaction can take place
