NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
An investment adviser representative (IAR) is approached by a client who expresses concern about recent market volatility and asks the IAR to guarantee a 5% return on their portfolio over the next year to protect their capital. How should the IAR respond to this client's request?
- AExplain that guaranteeing returns is prohibited and unethical, and discuss risk management strategies instead.
- BAgree to the guarantee, provided the client signs a waiver acknowledging the risks involved.
- CSuggest a low-risk investment strategy that historically yields 5% to indirectly meet the client's expectation.
- DInform the client that such guarantees are only permissible for certain fixed-income investments.
Show answer & explanationAnswer & explanation
Correct answer: A. Explain that guaranteeing returns is prohibited and unethical, and discuss risk management strategies instead.
Guarantees of returns are strictly prohibited for IARs and investment advisers under securities laws. IARs have a fiduciary duty to act in the client's best interest, which includes educating them about realistic expectations and risks, not making false promises.
Why the other options are wrong
- B. Guarantees are prohibited, and a waiver does not make an illegal act legal.
- C. Suggesting a strategy to 'indirectly meet' a guaranteed return is misleading and still implies a guarantee, which is prohibited.
- D. Guarantees of returns on investment advisory services are prohibited across all investment types.
Prohibition on Guaranteeing Returns
Investment advisers and their representatives are strictly prohibited from guaranteeing specific returns on investments or promising to protect clients from losses.
- Violates fiduciary duty and anti-fraud provisions.
- Investors must understand that all investments carry risk.
- IARs must provide realistic expectations and disclose risks.
- Applies to all types of investments and services.
Memory trick: Never guarantee gains, like a broken slot machine, it's a fraud claim.