Chapter 26 Working With the Retail Client RQ Flashcards
David Breay, recently retired, has moved from Toronto to Owen Sound. He feels expenses will be lower in a small town. Pamela D’Costa, an IA, is meeting with David, gathering information about David’s personal and financial situation. He mentions that he has not yet found an apartment to rent and is growing concerned as he has to be out of his place in Toronto by the end of the month. Pamela mentions that she knows of an apartment building that has a unit to rent and offers to give the owner a call. David gladly accepts. Pamela did not mention that her sister owns the apartment building. Did Pamela behave in an ethical manner or break any rules?
A. Pamela’s actions were both ethical and compliant with all the rules as she was just trying to help a potential new client, not benefit from the transaction.
B. Pamela was compliant with all the rules, but behaved unethically as she should have disclosed that she was related to the owner of the apartment building.
C. Pamela was not compliant with the rules as she cannot benefit personally from a third-party transaction without her client being informed.
D. IIROC’s Standards of Conduct only apply to actions with respect to investments, so Pamela did not break any rules, but behaved unethically as she should have disclosed that she was related to the owner of the apartment building.
B. Pamela was compliant with all the rules, but behaved unethically as she should have disclosed that she was related to the owner of the apartment building.
Pamela was compliant with all the rules, as she was not benefiting financially from the transaction. The Standards of Conduct apply to all actions and everyday behaviour, not just investment transactions. However, she behaved in an unethical manner in that she should have mentioned that the apartment was owned by her sister.
An investment advisor’s responsibility for full disclosure of conflicts of interest falls under which of the five primary values?
A. Professionalism.
B. Confidentiality.
C. Duty of care.
D. Integrity.
D. Integrity.
Integrity requires that advisors ensure fair and objective dealings with clients by disclosing all real and potential conflicts of interest.
How often, at a minimum, should a financial plan be reviewed?
A. Semi-annually or when the client has made changes to her will.
B. Every January, in order to encourage RRSP contributions.
C. Annually or when there is a significant change in the circumstances of the client.
D. Whenever the client wants to make a trade.
C. Annually or when there is a significant change in the circumstances of the client.
Financial plans should be reviewed at least once a year. However, if there is a material change in the personal or financial circumstances of the client, a review should be undertaken immediately.
Calculate the Net Worth of an investor with the following assets and liabilities ($ 000’s) – cash $10, credit cards $3, RRSP $45, car $10, mortgage on home $200, GIC $30, consumer loan $10, home $350.
A. $213
B. $232
C. $445
D. $658
B. $232
An individual’s net worth is calculated as total assets minus total liabilities. In this example, the net worth is ($445 - 213) or $232. Total assets are (cash + GIC + RRSP + home + car) or ($10 + 30 + 45 + 350 + 10) or $445. Total liabilities are (credit cards + mortgage on home + consumer loan) or ($3 + 200 + 10) or $213.
George is a young professional with a good income and no dependents. A person in this life-cycle stage usually has growth as an objective. Identify the situation where this objective of growth may not be suitable for George.
A. He recently inherited $100,000.
B. He recently became engaged to another young professional.
C. His father lost most of his life savings in penny mining stocks and George is risk averse.
D. He has been promoted twice in the last two years.
C. His father lost most of his life savings in penny mining stocks and George is risk averse.
George would normally have an investment objective of growth, but because he is risk averse, this objective would have to be modified to focus on safety of capital as well as growth.
Identify a typical investment objective for a client in Stage 4 of the life cycle.
A. Preservation of capital.
B. Setting up an RESP for children.
C. Aggressive growth to increase capital.
D. Earning income to support themselves.
A. Preservation of capital.
As the individual gets closer to retirement, the portfolio should become less risky. Capital preservation becomes a more significant objective.
Identify the life-cycle stage where an individual’s expenses usually decline and income and savings usually increase?
A. Retirement years.
B. Family commitment years.
C. Early earning years.
D. Nearing retirement years.
D. Nearing retirement years.
In the nearing retirement stage, an individual’s expenses usually decline and income and savings usually increase.
Sometimes there are no rules that directly cover a situation. What should the IA rely on to make the appropriate decision?
A. Intuition.
B. Ethics.
C. Knowledge.
D. Experience.
B. Ethics.
While there are rules to deal with the most significant or common situations, rules cannot encompass every possible situation that may occur in day-to-day business. Ethical behaviour requires internally established moral judgments. Ethical decision-making is a system that can be applied to any situation.
Duty of care is one of the five primary values that registered individuals must observe. Identify the component in duty of care that requires all recommendations be based on careful analysis of the client and the particular transaction.
A. Disclosure.
B. Priority of client’s interest.
C. Honesty.
D. Due diligence.
D. Due diligence.
Due diligence requires that registrants must make all recommendations based on a careful analysis of both information about the client and information related to the particular transaction.
Identify the action that breaches the Standard of Professionalism.
A. The client’s interest must be given priority.
B. The IA devotes approximately 2 hours per day to his personal account.
C. Potential conflicts of interest must be disclosed.
D. The IA continuously takes refresher and specialized courses.
B. The IA devotes approximately 2 hours per day to his personal account.
Personal trading activity should be kept to reasonable levels. If a registrant is trading his or her own account very actively on a daily basis, it is doubtful that the registrant will have enough time to properly service his or her clients.
Jagomir, an IA, is looking at an IPO that is available. It is a start-up company in the natural resources sector. He is trying to decide which of his clients he should mention this new offering to. Identify the client that would be most likely to have objectives that this security could meet, based on the stages of the life cycle.
A. Sally Proctor, in Stage 2.
B. Vitaliy Charomir, in Stage 3.
C. Ling Yuen, in Stage 1.
D. Andy Lavoie, in Stage 5.
C. Ling Yuen, in Stage 1.
Ling Yuen, in Stage 1, the early earning years, would be the most appropriate as she is young and can afford to take on more risk than the people in the later stages. Sally Proctor, in Stage 2, the family commitment years, likely has more commitments and less liquidity, needing income for RESPs, mortgages, loans, etc. Vitaliy Charomir, in Stage 3, the mature earning years, needs to be more conservative as people in this stage are focusing on saving for retirement. Andy Lavoie, in Stage 5, the retired years, needs to preserve capital, not invest in risky equities.
Marc, an IA, phones his wife, a lawyer at a major legal firm. During their conversation, he discusses with her the financial position of one of his clients, asks for her recommendation for a lawyer to draft a will for another client, suggests to her that she consider purchasing a new IPO for her personal investment account, and asks her to have her secretary send him a list of corporate lawyers at the firm. What action would likely be considered unethical?
A. Recommending an IPO for her account.
B. Asking for a recommendation for a lawyer.
C. Discussing a client’s financial position.
D. Requesting a list of lawyers at the firm.
C. Discussing a client’s financial position.
In this instance, Marc’s only unethical behaviour lies in discussing the client’s position with his wife. Regardless of their marital status, he must maintain strict client confidentiality. Asking a lawyer at a major legal firm for a recommendation for legal services, providing an investment recommendation to his wife, and requesting a corporate directory are all acceptable activities.
Nakgeeran and Kamini are 27 years old, married, and both graduated from university 3 years ago. Together, they are earning $125,000 annually before taxes. They are expecting to purchase their first home in 2 years, and are nearly finished paying off their student loans. Identify the stage in the life cycle that they would be in.
A. Retirement years.
B. Early earning years.
C. Family commitment years.
D. Mature earning years.
B. Early earning years.
While the life-cycle analysis is not an absolute model, it does help guide IAs in beginning to formulate an investment plan. In this case, Early Earning Years – to age 35 would be most likely as a good starting point. In this stage, typically, the client is starting a career, building net worth and assuming family and home ownership responsibilities.
Nisar has met with his client, gathered and analyzed her data, and determined appropriate goals and objectives respecting the client’s specific problems and constraints. He has begun to invest for the client based on his analysis, and is planning on sending out his first investment statement this month. What step has Nisar missed in the financial planning process?
A. Implementing the recommendations.
B. Establishing client-advisor engagement.
C. Periodically reviewing and revising the plan.
D. Recommending strategies to meet goals.
D. Recommending strategies to meet goals.
Nisar followed each of the stages in the initial establishment of a client and advisor relationship, except developing a plan of action. This stage is important as it puts in concrete form for both parties to review the parameters of the client/advisor relationship. He did execute d) and b), and c) would follow in the future as the client and advisor continue to work together.
Under the trustworthiness, honesty and fairness section of the primary values, identify the component that requires advisors ensure a client’s assets are used solely for the client’s purposes.
A. Respect for client’s assets.
B. Personal business.
C. Priority of client’s interests.
D. Personal financial dealings with clients.
A. Respect for client’s assets.
Respect for a client’s assets requires that the client’s assets are solely the property of the client and are to be used only for the client’s purposes. You must not utilize client’s funds or securities in any way to suit your own or third party’s interests.
