A client, Mr. Johnson, approaches his investment adviser representative (IAR) and expresses a strong desire to invest all of his liquid assets, approximately $500,000, into a single, highly speculative biotechnology stock that the IAR knows to be extremely volatile and illiquid. The IAR conducts due diligence and determines that this investment is clearly unsuitable for Mr. Johnson's stated financial goals, risk tolerance, and time horizon. What is the IAR's primary ethical obligation in this situation?
- ATo execute the trade after obtaining a signed waiver from Mr. Johnson acknowledging the risks.
- BTo execute the trade as requested by Mr. Johnson, as he is the ultimate decision-maker.
- CTo refer Mr. Johnson to another IAR who may be willing to execute the trade.
- DTo strongly advise against the investment and document the concerns, but ultimately refuse to execute the unsuitable trade.
Show answer & explanationAnswer & explanation
Correct answer: D. To strongly advise against the investment and document the concerns, but ultimately refuse to execute the unsuitable trade.
Under the fiduciary duty, an IAR must always act in the best interest of the client. If an investment is clearly unsuitable, the IAR's primary obligation is to protect the client, which includes refusing to execute an unsuitable trade, even if the client insists. Documenting the advice is also crucial.
Why the other options are wrong
- A. A waiver does not absolve an IAR of their fiduciary duty to recommend suitable investments and can be seen as an unethical attempt to bypass suitability requirements.
- B. Executing a clearly unsuitable trade violates the fiduciary duty to act in the client's best interest.
- C. Referring an unsuitable client to another IAR who might execute the trade is unethical and does not fulfill the IAR's fiduciary duty to the original client.
IAR Fiduciary Duty (Unsuitable Trade)
An IAR's fiduciary duty requires them to always act in the client's best interest, which includes refusing to execute a trade that is clearly unsuitable for the client's financial situation, risk tolerance, and objectives, even if the client insists.
- Fiduciary duty is paramount.
- Suitability is a core component.
- IAR must protect client from self-harm (financially).
- Refusal to execute is permissible and often required for unsuitable trades.
- Documentation of advice and client refusal is critical.
Memory trick: Fiduciary's shield blocks client's risky yield.