Lecture #5 Flashcards
What is Standard III: Duties to Clients, (A) Loyalty, Prudence, and Care
- Act in the client’s best interest, prioritizing their needs over personal or employer interests.
- Maintain client trust by ensuring all decisions are made with their benefit in mind.
- Adhere to legal and ethical standards, ensuring compliance with all applicable laws.
- Exercise the same level of care and diligence as one would in managing their own affairs.
Define Fiduciary & Fiduciary Responsibility
Fiduciary
- A trusted individual responsible for acting in another’s best interest (e.g., financial advisors, trustees).
- The client-advisor relationship is built entirely on trust and confidence.
- A fiduciary cannot profit from their position without the client’s explicit consent.
Fiduciary Responsibility
- A fiduciary must not seek personal gain from opportunities related to their role.
- Strictly prohibited:
- Undisclosed kickbacks
- Secret commissions
- Hidden profits or discounts
- Fiduciaries must always act with integrity and in the best interest of their clients.
What are Client Accounts? and list some examples of some
Client Accounts: are managed according to agreements, or governing documents between the client, the institution, and the advisor
- Accounts can be:
- Custodial accounts – control of the clients assets
- Trust accounts – e.g. savings account,
- Escrow Account – used for certain purposes i.e. only to pay taxes, only to pay insurance premiums
- Discretionary accounts – ability to act on behalf of the client without the need to check with the client
- Non discretionary accounts – need to * receive client’s permission to act.
define Proxy Voting and Directed Brokerage
Proxy Voting– [Vote on the behalf of the client/shareholder] ensure that when voting any proxies that the vote is in the best interest of your client
Directed brokerage is when a client recommends that the investment manager deals with the clients broker and not the investment manager’s broker.
what is Standard III: Duties to Clients (B) Fair dealings… and what could go wrong?
Standard III (B): Duties to Clients (B) Fair dealings: requires that all clients be treated in a fair manner and that there is not to be any discrimination based on the size of the account, type of client or personal likes or dislikes, or family connections.
What could go wrong:
Chance to favour some clients over others; This may lead to favoritism including:
* Timing of information
* Quality of advice
* Timing of trades
Investment Recommendations
* It is critical to understand that the method and timing of the dissemination of information may affect the “” of the “”.
* All clients must have a “” “” to act on all “” “”
- price, security
- fair opportunity; new information
Clients of a company may receive “research reports” for which they pay,
BUT information must also be “_” to external clients, this information is referred to as a “_”
Distributed, Communication
defien Sales
Sales: The act of selling includes any form of communication by an investment professional, a fund manager, its promoter, a financial planner, etc. with a client or a potential client to induce them to purchase a product or a service
what is Standard III: Duties to Clients (E) Preservation of Confidentiality:
Standard III: Duties to Clients (E) Preservation of Confidentiality:
* Members and Candidates must keep information about current former and prospective clients confidential UNLESS:
- The information concerns illegal activities on the part of the client
- Disclosure is required by Law
- The client or perspective client permits disclosure of the information
Who are Pickers
Pickers
Analysts who compare a stock’s intrinsic value to its market value to make investment recommendations. Such as Buy, Sell, and Hold
Difference between Fundamental Analysts & Quantitative Analysts (“Quants”)
Fundamental Analysts
* Approach:
○ Examine financial statements.
○ Study industry trends and economic factors affecting company profitability.
Quantitative Analysts (“Quants”)
* Approach:
○ Use statistical and mathematical models to detect mispricing in securities.
○ Apply large data sets to find systematic patterns.
What is behavioural Finance?
-
Behavioral finance integrates psychology with economic rationality to explain market behavior.
- Ethical analysts must be aware of cognitive biases that can lead to irrational decisions.
Investors trust professionals to be rational, but biases can unintentionally harm them.
- Ethical analysts must be aware of cognitive biases that can lead to irrational decisions.
what is Regret Aversion and Herding
Regret Aversion:
○ Analysts hesitate to revise their recommendations due to fear of admitting mistakes.
○ Ethical analysts should welcome critique and update recommendations based on new data.
Herding: Analysts mimic each other’s behavior rather than making independent calls.
Define Anchoring and Overreaction
Anchoring: Holding on to a past reference point even when it is no longer valid.
○ Example:
- A stock falls significantly from its high.
Analyst recommends buying just because it looks cheap compared to its past peak
Overreaction: Over-exaggerated response to good or bad news.
○ Example:
§ A company beats earnings estimates for one quarter.
§ Analyst projects continued high earnings growth, assuming a permanent trend.
Analysts must provide independent, unbiased research. But what should Analysts do if they take third party reserach?
- Third-Party Research:
○ Provided by firms like S&P, Bloomberg, and Dow Jones.
○ Must be properly cited to avoid misrepresenting ownership.
Analysts should critically assess third-party research for bias or calculation errors.
