FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A client, age 70, has a portfolio heavily concentrated in a single blue-chip stock that they inherited from their parents. This stock represents 80% of their total investable assets. The client expresses a strong emotional attachment to the stock and is reluctant to sell any shares, despite the registered representative's advice on diversification. Which of the following is the MOST appropriate action for the registered representative?
- AInsist that the client sell a portion of the concentrated stock immediately to comply with diversification best practices.
- BRefuse to service the account until the client agrees to diversify their portfolio.
- CObtain a written statement from the client acknowledging the risks of concentration and absolving the firm of responsibility.
- DDocument the client's refusal to diversify and proceed with other suitable recommendations for the remaining 20% of assets.
Show answer & explanationAnswer & explanation
Correct answer: D. Document the client's refusal to diversify and proceed with other suitable recommendations for the remaining 20% of assets.
When a client refuses to follow suitable recommendations, the representative's primary duty is to document this refusal thoroughly. While diversification is important, the client ultimately makes the final decision. The representative should continue to advise on the rest of the portfolio.
Why the other options are wrong
- A. While diversification is ideal, a representative cannot force a client to sell holdings, especially if there's emotional attachment. This would be an overreach.
- B. Refusing to service the account is an extreme measure and generally not required if the client is simply refusing a recommendation, provided the refusal is documented.
- C. While documenting is good, obtaining a statement 'absolving the firm of responsibility' is problematic and not a standard or appropriate practice. The firm still has a duty of care and suitability.
Client Refusal of Suitability Advice
When a client declines to follow a registered representative's suitable recommendations, requiring thorough documentation of the advice given and the client's decision.
- Representative must document the advice and client's refusal.
- Client's autonomy is respected.
- Firm remains responsible for suitability of *accepted* recommendations.
Memory trick: Documented Disagreement, Continued Duty