Investment Advisory Practices Flashcards
What is not pertinent when opening an account, a client’s educational or financial background?
Educational background
If a client gives little information when opening an account, what securities may an agent recommend to the client?
Only securities that are suitable based on the information the client did provide
What is soft-dollar compensation?
Non cash compensation paid by a BD to an IA for directing securities transactions.
What forms of soft-dollar compensation are acceptable?
Research reports, seminars, software used to provide analysis
What forms of soft-dollar compensation are NOT acceptable?
Rent, travel expense reimbursement, hardware, furniture, entertainment, meals
True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions.
True
True or False: Under the Uniform Prudent Investor Act (UPIA), an IA’s main objective should be risk avoidance.
False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk.
IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s ___________ responsibility.
IAs have greater responsibility to their clients than BDs. This is referred to as the IA’s fiduciary responsibility.
True or False: A mutual fund asset allocation program requires a special wrap program disclosure document.
False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds.
Identify the acronym: UPIA
Uniform Prudent Investor Act
Describe a soft-dollar arrangement between an IA and a BD.
An IA directs client transactions to a specific BD in return for research and brokerage services.
To be allowed, a soft-dollar arrangement must benefit ____________.
To be allowed, a soft-dollar arrangement must benefit the client.
Identify some permissible uses of soft-dollar arrangements.
Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.
What are some of the examples of items that cannot be covered by a soft-dollar arrangement?
Advertising, travel expense reimbursement, meals and entertainment, and computers
True or False: An agent must always have reasonable grounds for recommending a particular security.
True
True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.
False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.
What duties does an IAR have according to the “know your customer” rules?
Make a reasonable inquiry into a customer’s background and provide suitable advice based on known information.
Define wrap account.
A managed account that charges clients an annual fee to cover trading, research, and advisory services
True or False: A fiduciary’s duty includes ensuring that all investment advice is impartial and disinterested.
True
In what type of arrangement may an IA acquire research reports without paying for them directly?
In a soft dollar arrangement, an IA may acquire research reports without directly paying the BD.
Is office furniture (e.g., a desk chair) included in an IA’s net worth?
Yes, provided it is fully owned by the IA.
True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors.
False. Risk should be managed, not avoided. Speculative investments (e.g., options and commodities) may reduce overall risk.
In what type of account is reverse churning most likely found?
A fee-based (wrap) account
Define fiduciary.
A person who acts on behalf of another, which gives rise to a relationship of trust and confidence.
