NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
An Investment Adviser Representative (IAR) is found to have recommended a highly speculative, illiquid limited partnership to a retired client with a conservative risk tolerance and no need for current income. The IAR failed to conduct adequate due diligence on the product and did not fully explain the risks to the client. Which ethical principle has the IAR most clearly violated?
- AThe duty of best execution.
- BThe duty of suitability.
- CThe duty of fair dealing.
- DThe duty to disclose conflicts of interest.
Show answer & explanationAnswer & explanation
Correct answer: B. The duty of suitability.
The duty of suitability requires an IAR to recommend investments that are appropriate for a client's specific financial situation, investment objectives, and risk tolerance. Recommending a speculative, illiquid product to a conservative retiree is a clear breach of this duty.
Why the other options are wrong
- A. The duty of best execution relates to achieving the most favorable terms for a client's transaction, which is separate from the appropriateness of the investment itself.
- C. The duty of fair dealing is a broader principle, but suitability is the specific ethical obligation violated by an inappropriate recommendation.
- D. While important, there is no mention of a conflict of interest in this scenario, so it's not the most direct violation.
Duty of Suitability
Investment advisers and their representatives must have a reasonable basis for believing that a recommendation is suitable for a client based on the client's financial situation, investment objectives, and risk tolerance.
- Requires understanding the client's profile.
- Requires understanding the investment product.
- Recommendations must align with the client's best interest.
Memory trick: IARs are like personal tailors; they must fit the investment to the client, not the other way around.