Chapter 5

Question 1

Investment advisers have a fiduciary duty to act in the best interest of their clients, which includes:

Answer 1

1. Having a reasonable and objective basis for the investment advice provided
2. Ensuring that the investment advice is suitable
3. Obtaining the best execution for its client’s securities
4. Disclosing potential conflicts of interests
5. Consulting with other professionals

Question 2

Broker-dealers recommendations versus Investment Advisers recommendations

Answer 2

Broker-dealers = suitable
IA’s = best interest

Question 3

Uniform Prudent Investor Act (UPIA)

Answer 3

-Based on Modern Portfolio Theory
-Examines trade off between risk and reward
-Analyzes portfolio as a whole
-Recognizes need for diversifcation
-Places no categorical restrictions on investments

Question 4

Soft Dollar Arrangements
Acceptable

Answer 4

An IA may pay higher commissions for trade execution in return for “soft” dollars if used to acquire services that will benefit its advisory clients

Acceptable:
1. Research reports
2. Analysis
3. Market Data
4. Seminars
5. Software used for analysis

Question 5

Soft Dollar Arrangements Unacceptable

Answer 5

1) Computer hardware
2) Telephone lines
3) Hiring personnel (salaries)
4) Rent
5) Travel, entertainment or meals

Question 6

Soft dollar arrangements need to be disclosed on?

Answer 6

Form ADV Part 2 or Brochure