Knowledge Check QQs Flashcards
Q1 (Section 1): Your actions could subject you to fiduciary accountability, even if you are unaware. True or False?
A1: True. Explanation: Performing fiduciary functions (e.g., giving personalized advice for compensation) can confer fiduciary status under law. Intent is irrelevant if you act as a fiduciary.
Q2 (Section 1): The duty of ___ requires acting with skill, prudence, and diligence of a prudent person.
A2: Care. Explanation: The duty of care means using the skill and diligence of a prudent professional in similar circumstances.
Q3 (Section 1): Which typically represents the highest standard of conduct for an advisor? (A) Employer standards (B) Legal standards (C) Professional organization standards
A3: (C) Professional organization standards. Explanation: These codes (e.g., fi360, CFP) often exceed minimal legal requirements, imposing stricter ethical rules.
Q4 (Section 1): Which on its own triggers fiduciary status? (A) Selling a security (B) Commission on a sale (C) Authority to name another fiduciary (D) Referring a client
A4: (C) Authority to name another fiduciary. Explanation: Even without explicit naming, having power to appoint another fiduciary generally confers fiduciary status.
Q5 (Section 1): Which documents are ‘governing’? (Service agreements, Marketing brochures, IPS, Trust docs, Presentations)
A5: Service agreements, IPS, and trust documents. Explanation: They define fiduciary obligations and roles, unlike brochures or general presentations.
Q6 (Section 1): Whose roles should be documented in the fiduciary process?
A6: Everyone involved (fiduciary or not). Explanation: Documenting each role prevents confusion and ensures accountability.
Q7 (Section 1): Why have formal bylaws for an investment committee? (A) Reduce workload (B) Make decisions w/o client (C) Provide clear governance (D) Limit fiduciary duty)
A7: (C) Provide clear governance. Explanation: Bylaws ensure consistent procedures, recordkeeping, and decision-making, supporting best practices.
Q8 (Section 1): Which method best avoids conflicts of interest? (A) Waiver (B) Structural separation (C) Fine-print (D) Ignoring immaterial conflicts)
A8: (B) Structural separation. Explanation: Disclosures are critical, but fully separating conflicting roles most effectively prevents self-dealing.
Q9 (Section 1): Which scenario reflects properly managed 12b-1 conflict under ERISA? (A) Exclusive referral, no compensation (B) Retain fees undisclosed (C) Rebate fees (D) Disclose relationship only)
A9: (C) Rebate fees. Explanation: Rebating 12b-1 fees back to the plan keeps compensation level, avoiding an undue conflict of interest.
Q10 (Section 1): How often should service agreements be reviewed unless circumstances say otherwise? (A) 5 yrs (B) 10 yrs (C) 1 yr (D) 3 yrs)
A10: (D) 3 years. Explanation: Reviewing every three years is a common fiduciary best practice to ensure services/fees remain reasonable.
Q11 (Section 1): An advisor has a tiered fee for equities vs. bonds. Which aligns with the duty of care? (A) Seek client approval each time (B) Objective modeling (C) Disclose orally (D) Switch to level fee next year)
A11: (B) Objective asset allocation modeling. Explanation: This demonstrates skill and prudence, ensuring recommendations are not driven by the advisor’s compensation structure.
Q12 (Section 1): What’s the best first step to manage cybersecurity risk? (A) Installing firewalls (B) Respond post-breach (C) Identify assets at risk (D) Staff training)
A12: (C) Identify assets at risk. Explanation: Per the NIST framework, ‘Identify’ is the initial phase before implementing protections.
Q13 (Section 2): Which factor is foundational when developing the asset allocation strategy?
A13: Time horizon. Explanation: It drives how aggressively or conservatively assets should be allocated, influencing overall risk tolerance.
Q14 (Section 2): During market volatility, what typically happens to correlations among asset classes?
A14: They often rise. Explanation: In stressed markets, uncorrelated assets can start moving in tandem, reducing diversification benefits.
Q15 (Section 2): True/False: Short-term disbursement obligations have minimal effect on asset allocation?
A15: False. Explanation: Near-term liquidity needs significantly constrain risk-taking capacity, often requiring more stable, liquid allocations.
Q16 (Section 2): Once risk tolerance is established, how is the portfolio modeled?
A16: Typically to maximize return at that risk level. Explanation: Using Modern Portfolio Theory, we aim for the efficient frontier given the client’s risk tolerance.
Q17 (Section 2): Projected returns for each asset class should be based on what?
A17: Reasonable forward-looking assumptions. Explanation: Simply relying on historical data can be misleading if economic conditions differ going forward.
Q18 (Section 2): Are projected returns equally crucial for foundations/endowments?
A18: Yes. Explanation: They must maintain spending without depleting principal, so accurate return forecasts are vital for long-term sustainability.
Q19 (Section 2): When is it appropriate to add non-traditional or alternative asset classes?
A19: When they add diversification or return benefits and can be effectively monitored. Explanation: The fiduciary must have resources to conduct due diligence, handle liquidity constraints, etc.
Q20 (Section 2): What is the appropriate level of detail in an IPS?
A20: Enough so a competent third party could implement it without confusion, but not so exhaustive it constantly needs revision. Explanation: Aim for clarity and flexibility.
Q21 (Section 2): When is ESG investing required?
A21: If governing documents or mission statements mandate it, and it doesn’t conflict with fiduciary duties. Explanation: A foundation charter may direct certain socially responsible screens, for example.
Q22 (Section 2): True or False: ESG in an ERISA plan is allowed if it aligns with fiduciary duties.
A22: True. Explanation: DOL guidance permits ESG as long as it doesn’t sacrifice economic interests or violate the prudent expert standard.
Q23 (Section 2): Which decision usually has the largest impact on long-term portfolio performance?
A23: Asset allocation. Explanation: Academic studies show it drives most of the variance in returns, overshadowing security selection or market timing.
Q24 (Section 2): For a DB plan, what determines the investment time horizon?
A24: The duration of liabilities (when benefits must be paid). Explanation: DB plans match investments to liability timing, factoring in plan demographics.
Q25 (Section 2): If projected returns are too high and not met, what’s the main risk?
A25: Underfunding objectives. Explanation: Overly optimistic assumptions create shortfalls, jeopardizing plan solvency or personal goals.
Q26 (Section 2): In a participant-directed plan, what must be provided regarding asset classes?
A26: Enough variety for participants to diversify properly. Explanation: Usually at least three core options with different risk/return profiles.
Q27 (Section 2): What key element should the IPS include about monitoring?
A27: Defined criteria and frequency for reviews. Explanation: Stating how often to compare performance, what benchmarks to use, and potential watch-list triggers is essential.
Q28 (Section 3): First step in selecting service providers?
A28: Identify needed services (recordkeeping, advisory, custody, etc.). Explanation: You must know your requirements before issuing an RFP or comparing providers.
Q29 (Section 3): Why is documentation critical in due diligence?
A29: It demonstrates prudence and a consistent method. Explanation: Detailed records (meeting minutes, RFP comparisons) help defend the fiduciary process if ever challenged.
Q30 (Section 3): When might unregulated investments be appropriate?
A30: If no comparable regulated product meets the need and the fiduciary can perform thorough due diligence. Explanation: Alternatives like hedge funds require heightened scrutiny for illiquidity, complexity, etc.
Q31 (Section 3): How do statutory or regulatory safe harbors benefit fiduciaries?
A31: They reduce liability if the fiduciary meets all the safe harbor requirements. Explanation: E.g., 404(c) protects plan sponsors from participant-directed investment losses, QDIA covers defaults, etc.
Q32 (Section 3): Prudent approach to evaluating active vs. passive or ESG vs. non-ESG funds?
A32: Apply consistent due diligence criteria (risk, return, fees, manager stability) for all. Explanation: Don’t let hype or biases replace methodical screening.
Q33 (Section 4): Underperforming a market index always necessitates changes. True or False?
A33: False. Explanation: You must consider context—investment style, time horizon, risk metrics, and the IPS goals. A short-term underperformance may not justify replacement.
Q34 (Section 4): Minimum recommended frequency for preparing performance reports?
A34: Quarterly. Explanation: While special circumstances might require more frequent checks, quarterly is the common fiduciary standard.
Q35 (Section 4): Which qualitative factors should be monitored for an investment manager?
A35: Staff turnover, regulatory issues, service quality, responsiveness, etc. Explanation: Qualitative stability can significantly impact performance and reliability.
Q36 (Section 4): When negative news arises about a service provider, the fiduciary must do what?
A36: Investigate thoroughly, assess potential impact, document the decision (retain or replace). Explanation: Ignoring it or acting rashly without due diligence can be imprudent.
Q37 (Section 4): A brokerage transaction generating soft dollars is always imprudent. True or False?
A37: False. Explanation: Soft dollars can be acceptable if used for research/brokerage services benefiting the client and monitored for reasonableness.
Q38 (Section 4): Outsourcing proxy voting to a third party is a fiduciary breach. True or False?
A38: False. Explanation: Delegation is permissible if done prudently and supervised. Fiduciaries still maintain oversight responsibility.
Q39 (Section 4): Which expense is typically not in a mutual fund’s expense ratio?
A39: Brokerage commissions. Explanation: The stated expense ratio covers management fees, 12b-1, admin fees, but excludes trading costs like commissions and spreads.
Q40 (Section 4): True/False: The more products are bundled, the more layers of fees likely exist.
A40: True. Explanation: Bundling can obscure individual cost components, requiring extra vigilance to ensure fees are still reasonable.
Q41 (Section 4): What is a Level 1 fiduciary assessment?
A41: A gap analysis. Explanation: You compare current processes vs. best-practice standards, identifying deficiencies that need remediation.
Q42 (Section 4): Which document is critical for carrying out a fiduciary process?
A42: The Investment Policy Statement (IPS). Explanation: It specifies objectives, asset allocation, monitoring, and roles. Courts often check whether actual behavior aligns with the IPS.
