Chapter 7 Part 1 Flashcards
Along with iAs and IARs, other examples of fiduciaries include
the executor or administrator of an estate, the trustee of a trust, and a pension plan administrator under the Employee Retirement Income Security Act (ERISA)
When fiduciaries make decisions in their official capacity They have an affirmative duty to
act in good faith and solely in the best interest of the client, not for their own personal gain
Any conflicts of interest that arise for the IA or iAR must be
fully and fairly disclosed to clients at or prior to the time the conflicts occur
There are essentially two approaches to examine regarding the evolution of the fiduciary relationship
the Prudent Man Rule and the Uniform Prudent Investor Act (UPIA)
the Prudent Man Rule
“trustees should ““observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their
funds, considering the probable income as well as the probable safety of the capital to be invested.”” Simply said, fiduciaries arc obligated to do what is best for the client they represent based on the objectives of the client”
under Uniform Prudent Investor Act
“a fiduciary, such as a custodian or trustee, may make individual investments that are risky as long as the overall risk/reward profile of the account is suitable. The UPIA also
permits fiduciaries to delegate investment responsibilities to competent third parties (e.g., an accountant and attorney”
SEC has indicated specific obligations that an adviser must adhere to as its fiduciary duty to its clients
duty to be loyal to clients, inquire, give only suitable advice, obtain best execution
An adviser must remain loyal to
its clients. If conflicts of interest arise, the adviser must determine if disclosure is enough or if it must abstain from the activity
Before providing advice, an investment adviser and its representatives should
make a reasonable inquity into the client’s financial situation, investment experience, and investment objectives. The extent of the inquiry depends on the advisory products and services being offered
You cannot make assumptions about the client. When no other information is available, you must
treat the client as if he has no assets or sources of income other than what you are aware of
An investment adviser representative who fails to obtain complete background information about a customer is in a different position than an agent of a broker-dealer. An agent who lacks information about a customer would be limited in the recommendations he could make, but would be able to
execute unsolicited orders for his clients. It would be difficult for an iAR to provide suitable advice without detailed information about a customer
Once an investment adviser has collected the appropriate client information, the investment advice given must be
suitable
What factors should be considered when thinking about the suitability of investment advice?
According to the SEC, one point to keep in mind is that certain types of risky investments should only be recommended to those clients who can understand the risks and are willing to accept these risks
According to NASAA’s Statement of Policy on Unethical Business Practices of Investment Advisers, the fees charged by an adviser must be
reasonable in comparison to the fees charged by other advisers for similar services
When in a position to direct brokerage transactions, the IA has a duty to obtain the best
execution for clients’ securities transactions. The best execution does not always mean obtaining the lowest possible commissions for client transactions. may take other factors into consideration such as the speed and quality of seivices that the brokerage firm provides.
