NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
An investment adviser representative (IAR) at a state-registered firm has a client who consistently requests that the IAR execute trades in a specific security without consulting the IAR's advice or the firm's research. The IAR believes these trades are highly speculative and unsuitable for the client's risk profile. What is the IAR's MOST appropriate course of action?
- AInform the client, in writing, that the IAR believes the trades are unsuitable, and document the client's directive.
- BExecute the trades as requested, as the client has the ultimate decision-making authority.
- CRefuse to execute the trades and advise the client to seek advice from another firm.
- DExecute the trades but require the client to sign a waiver absolving the IAR and firm of all liability.
Show answer & explanationAnswer & explanation
Correct answer: A. Inform the client, in writing, that the IAR believes the trades are unsuitable, and document the client's directive.
An IAR has a fiduciary duty to act in the client's best interest. While a client can override advice, the IAR must document their concerns and the client's decision to protect both parties and demonstrate compliance with suitability obligations.
Why the other options are wrong
- B. Executing without documentation of unsuitability could leave the IAR liable.
- C. Refusing outright may be too extreme and could be seen as failing to serve the client, unless the trades are illegal or unethical.
- D. Waivers of liability for unsuitability are generally not enforceable and are considered unethical and prohibited.
Client Directed Unsuitable Trades
When a client insists on executing trades that an IAR deems unsuitable for their risk profile; the IAR must advise against, document, and then proceed with the client's directive unless ethically or legally prohibited.
- IAR has fiduciary duty to advise.
- Client can override IAR's advice.
- Documentation of advice and client's decision is crucial.
- Waivers of liability are generally unenforceable.
Memory trick: Advise, Document, Proceed (or not).