NASAA Series 63Ethical Practices and ObligationsMedium
An investment adviser representative (IAR) manages a client's portfolio. The client recently inherited a substantial sum of money and informs the IAR that they wish to invest it aggressively, stating, 'I want to double my money in a year, no matter the risk.' The IAR, recognizing the client's inexperience, proceeds to invest the entire inherited sum into highly speculative penny stocks. Which ethical practice has the IAR most likely violated?
- ASuitability obligation
- BChurning
- CCommingling of funds
- DSelling away
Show answer & explanationAnswer & explanation
Correct answer: A. Suitability obligation
The IAR has a suitability obligation to ensure that all investment recommendations and actions are appropriate for the client's financial situation, risk tolerance, and investment objectives. Despite the client's aggressive request, the IAR should have advised against such a high-risk strategy if it was clearly unsuitable for the client's overall profile, especially given their stated inexperience.
Why the other options are wrong
- B. Churning involves excessive trading in a client's account to generate commissions, which is not the primary issue described in this scenario, although it could be a secondary concern depending on subsequent activity.
- C. Commingling of funds involves mixing client funds with the IAR's own funds, which is not described here.
- D. Selling away refers to an agent selling securities not offered by their broker-dealer, which is not indicated in the scenario.
Suitability Obligation
The ethical and regulatory requirement for investment professionals to recommend investments that are appropriate for a client's financial situation, investment objectives, and risk tolerance.
- Applies to all recommendations and transactions.
- Requires due diligence into client's profile.
- Protects clients from inappropriate investments.
Memory trick: Suit-able choices fit the client's goals.