An investment adviser representative (IAR) is approached by a client with a large sum of money and expresses a strong desire to invest it all in a single, highly speculative biotechnology stock, despite the IAR's advice to diversify. The client has signed a document acknowledging the risks and overriding the IAR's suitability recommendations. The IAR executes the trade. Which of the following statements best describes the IAR's fiduciary duty in this situation?
- AThe IAR should have refused the trade and reported the client's irrational behavior to the state administrator.
- BThe IAR has violated their fiduciary duty by executing an unsuitable trade, even with client acknowledgment.
- CThe IAR fulfilled their fiduciary duty by providing suitable advice and documenting the client's override.
- DThe IAR's fiduciary duty is negated once the client signs a waiver of suitability.
Show answer & explanationAnswer & explanation
Correct answer: C. The IAR fulfilled their fiduciary duty by providing suitable advice and documenting the client's override.
An IAR's fiduciary duty includes providing suitable advice and acting in the client's best interest. However, clients ultimately control their accounts. When a client insists on an unsuitable trade against advice, and the IAR documents this advice and the client's informed override, the IAR has fulfilled their duty by educating the client and protecting themselves through documentation, while still executing the client's directive.
Why the other options are wrong
- A. Refusing a client's direct order (with informed consent) can be problematic, and reporting the client for making a (documented) risky decision is not appropriate.
- B. Executing an unsuitable trade with proper documentation of client override does not, in itself, constitute a violation of fiduciary duty.
- D. Fiduciary duty is not 'negated' by a waiver; rather, the IAR's response to the client's override is a component of fulfilling that duty.
IAR Fiduciary Duty & Unsolicited Trades (Override)
When a client insists on an unsuitable, unsolicited trade against an IAR's advice, the IAR fulfills their fiduciary duty by providing suitable advice, documenting the client's override, and then executing the client's directive.
- Fiduciary duty requires acting in client's best interest.
- Client has final authority over their account decisions.
- Documentation of advice and client's override is paramount.
- The IAR ensures informed consent for the client's decision.
Memory trick: Advise, Document, Obey: The IAR's duty when clients choose their own way.