CFA Level IEthical and Professional StandardsMedium
A portfolio manager at an asset management firm routinely allocates new client assets into the firm's proprietary mutual fund, which carries management fees 50 basis points higher than comparable external funds with similar risk/return profiles, without disclosing this fee differential or the reason for the allocation to clients. Which duty is most clearly violated?
- AStandard III(B), Fair Dealing, because not all clients receive the same investment recommendation
- BStandard VI(C), Referral Fees, because she must disclose compensation arrangements related to referrals
- CStandard III(A), Loyalty, Prudence, and Care, because she is not acting in the sole benefit of clients by failing to disclose the fee differential and rationale
- DStandard I(B), Independence and Objectivity, because her judgment is being influenced by third-party compensation
Show answer & explanationAnswer & explanation
Correct answer: C. Standard III(A), Loyalty, Prudence, and Care, because she is not acting in the sole benefit of clients by failing to disclose the fee differential and rationale
Standard III(A) requires members to act for the benefit of clients and place client interests before their employer's or their own. Allocating client assets into higher-cost proprietary products without disclosing the fee differential or rationale breaches the duty of loyalty and undermines the client's best interests.
Why the other options are wrong
- A. The issue is not disparate treatment across clients but self-interested allocation and lack of disclosure.
- B. No third-party referral fee arrangement is described here.
- D. Independence/objectivity concerns undue influence in research judgments, not asset allocation loyalty.
Loyalty, Prudence, and Care (III(A))
Members must act for the benefit of clients, placing client interests before their employer's and their own, and exercise prudent judgment consistent with the applicable investment mandate.
- Duty of loyalty runs primarily to the client, not the employer
- Undisclosed self-dealing (e.g., higher-fee proprietary products) breaches this duty
- Full disclosure of costs and rationale is required
Memory trick: Client comes before the firm's fund lineup.