NASAA Series 63Ethical Practices and ObligationsEasy
An investment adviser representative (IAR) manages a client's portfolio, which includes a significant portion of highly illiquid alternative investments. The client, a retiree, has explicitly stated that their primary investment objective is capital preservation and income generation, with a low-risk tolerance. The IAR, without consulting the client, decides to rebalance the portfolio by selling some income-producing bonds and purchasing more of the illiquid alternative investments, citing potential for higher long-term growth. This action is most likely a violation of which ethical practice?
- ASelling Away
- BUnsuitable Recommendations
- CCommingling
- DFront-running
Show answer & explanationAnswer & explanation
Correct answer: B. Unsuitable Recommendations
The IAR's actions directly contradict the client's stated investment objectives and risk tolerance, making the rebalancing an unsuitable recommendation. The IAR prioritized potential growth over the client's desire for capital preservation and income generation with low risk.
Why the other options are wrong
- A. Selling away involves transactions conducted outside the employing broker-dealer's supervision.
- C. Commingling is the mixing of client funds with the agent's personal funds.
- D. Front-running involves an agent trading on advance knowledge of a client's large order.
Suitability Obligation
The obligation for investment professionals to recommend investments that are appropriate for a client's financial situation, investment objectives, and risk tolerance.
- Must understand client's profile (age, income, net worth, objectives, risk tolerance).
- Recommendations must align with this profile.
- Ongoing obligation to monitor suitability.
Memory trick: Fit the investment puzzle to the client's financial profile.