Standard V. Investment Analysis Flashcards
Standard V. Investment analysis, recommendation, or action:
Diligence and Reasonable Basis (V(A))
Diligence and Reasonable Basis (V(A))
What It Means:
* Always conduct thorough research and due diligence before making investment recommendations.
* Ensure there is a reasonable and adequate basis for all investment decisions, backed by solid analysis.
Why It’s Important:
* Prevents reckless or uninformed recommendations.
* Ensures that investment actions are based on objective and credible information.
Best Practices:
✅ Analyze financial data: Review company reports, earnings statements, and industry trends.
✅ Consider various sources: Look at market trends, economic conditions, and expert opinions.
✅ Remain independent: Avoid being influenced by personal biases or external pressures.
✅ Review assumptions: Ensure models and forecasts are reasonable.
Examples:
✅ Following the Rule:
A portfolio manager recommends a stock after reviewing financial statements, speaking with company management, and analyzing market trends.
❌ Breaking the Rule:
An analyst suggests investing in a startup solely because a social media influencer says it’s “the next big thing,” without verifying the claim.
Communication with Clients (V(B))
Communication with Clients (V(B))
What It Means:
- Be clear and transparent when communicating with clients about investments.
- Distinguish between facts (objective data) and opinions (forecasts, predictions).
- Disclose risks, fees, and changes in the investment process.
Why It’s Important:- Helps clients make informed decisions.
- Prevents misleading or exaggerated statements.
- Builds trust and credibility in client relationships.
Best Practices:
✅ Explain your investment strategy: Tell clients how you analyze investments and what factors you consider.
✅ Be upfront about costs: Clearly state any fees or commissions.
✅ Highlight risks: If an investment carries high volatility or liquidity risks, make it clear.
✅ Notify of changes: If your investment strategy shifts, inform clients right away.
✅ Separate fact from opinion: If making a projection, say, “This is a forecast based on historical data.”
Examples:
✅ Following the Rule:
An investment adviser informs a client that a structured product may be hard to sell in a downturn due to low liquidity.
❌ Breaking the Rule:
An analyst writes, “This stock will double in a year,” without clarifying that it is a prediction, not a certainty
Record Retention (V(C))
Record Retention (V(C))
What It Means:
- Maintain records of all research, analysis, and client communications related to investment decisions.
- Keep records for at least seven years or as required by law.
Why It’s Important:- Provides a paper trail to justify investment decisions.
- Protects against legal disputes or compliance issues.
- Ensures consistency in investment research and recommendations.
Best Practices:
✅ Document investment research: Save reports, meeting notes, and spreadsheets.
✅ Record client communications: Keep copies of emails, disclosures, and recommendations.
✅ Follow firm and regulatory policies: Maintain records as required by law and company policies.
Examples:
✅ Following the Rule:
A financial analyst keeps a digital record of research reports supporting a buy recommendation.
❌ Breaking the Rule:
An investment manager deletes old reports, making it impossible to verify why certain stocks were recommended.
Ahmed bases his recommendation on third-party research but fails to assess its credibility or assumptions.
A) V(A)
B) V(B)
C) V(C)
A
Liu updates her clients on portfolio changes but doesn’t explain the risks associated with a new strategy.
A) V(A)
B) V(B)
C) V(C)
B
Cheng uses outdated assumptions from 3 years ago in a new company valuation.
A) V(A)
B) V(B)
C) V(C)
A
Nelson gives a client an investment recommendation but doesn’t clarify which parts are facts and which are personal opinions.
A) V(A)
B) V(B)
C) V(C)
B
Rodriguez doesn’t keep records of model changes that materially affected his past recommendations.
A) V(A)
B) V(B)
C) V(C)
C
Singh prepares a portfolio recommendation based on historical return data, but makes no effort to assess current suitability.
A) V(A)
B) V(B)
C) V(C)
A
Miller uses a model to project returns but fails to disclose the assumptions or limitations of the model to clients.
A) V(A)
B) V(B)
C) V(C)
B
Petrov writes a research report but fails to disclose that he owns a significant personal stake in the company.
A) V(A)
B) V(B)
C) V(C)
B
Kim recommends a complex derivative strategy but doesn’t explain it clearly to the client.
A) V(A)
B) V(B)
C) V(C)
B
Evans downloads industry data and uses it to recommend several stocks without checking for accuracy or relevance.
A) V(A)
B) V(B)
C) V(C)
A
Clark distributes marketing material with investment performance but omits major risks related to the strategy.
A) V(A)
B) V(B)
C) V(C)
B
Thompson reuses templates for reports and accidentally copies outdated assumptions into a current client recommendation.
A) V(A)
B) V(B)
C) V(C)
A
Freeman summarizes an investment process in a client pitch but fails to update the description after a major change in methodology.
A) V(A)
B) V(B)
C) V(C)
B
De la Cruz doesn’t document the basis for recommendations she made to several institutional clients.
A) V(A)
B) V(B)
C) V(C)
C
Nguyen provides performance data to clients but doesn’t distinguish gross from net returns.
A) V(A)
B) V(B)
C) V(C)
B
Lopez fails to keep records of emails that contain key justifications for investment decisions.
A) V(A)
B) V(B)
C) V(C)
C
O’Donnell recommends an M&A deal based on internal insights but doesn’t support it with public data or valuation analysis.
A) V(A)
B) V(B)
C) V(C)
A
Diaz tells clients she selects mutual funds based on performance but omits that she excludes funds with less than 5 years of history.
A) V(A)
B) V(B)
C) V(C)
B
Kumar sends a generic investment newsletter but fails to disclose that past performance is not indicative of future results.
A) V(A)
B) V(B)
C) V(C)
B
Wong posts a research blog about a new company without checking if all financial data has been audited.
A) V(A)
B) V(B)
C) V(C)
A
Sato delivers a favorable recommendation on a new IPO but doesn’t inform clients that she didn’t conduct any due diligence.
A) V(A)
B) V(B)
C) V(C)
B