FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsEasy
A registered representative (RR) is reviewing a client's investment portfolio and notices that a significant portion of their assets are concentrated in a single, highly volatile sector fund, which was purchased several years ago when the client was younger and had a higher risk tolerance. The client is now nearing retirement and has expressed a desire for more conservative investments. What is the RR's primary ethical consideration?
- AThe potential tax implications of selling the concentrated position.
- BThe fees associated with rebalancing the portfolio into more conservative investments.
- CThe historical performance of the concentrated sector fund.
- DThe client's current risk tolerance and investment objectives.
Show answer & explanationAnswer & explanation
Correct answer: D. The client's current risk tolerance and investment objectives.
Suitability is an ongoing obligation. The RR's primary ethical consideration is the client's current risk tolerance, investment objectives, and financial situation, especially as they change over time (e.g., nearing retirement). The portfolio should be adjusted to align with these current factors.
Why the other options are wrong
- A. While tax implications are important, they are secondary to the primary suitability obligation.
- B. Fees are a factor, but the primary ethical consideration is the suitability of the investments themselves, not just the cost of rebalancing.
- C. Historical performance is relevant but does not override the need to align with current client objectives.
Ongoing Suitability Obligation
The continuous duty of a registered representative to ensure that recommended investments and investment strategies remain appropriate for a client's changing financial situation, risk tolerance, and investment objectives.
- Suitability is not a one-time assessment.
- Requires periodic review of client profiles and portfolios.
- Changes in client life events (e.g., retirement, age) necessitate re-evaluation.
- A core principle of ethical conduct and investor protection.
Memory trick: Suitability's a journey, not a stop; keep checking client's current top.