NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
A client approaches an investment adviser representative (IAR) with a large sum of money and explicitly instructs them to invest it entirely in a highly speculative, illiquid private equity fund, despite the IAR's strong recommendation against it due to the client's moderate risk tolerance and long-term financial goals. The IAR documents the discussion and the client's insistence. If the IAR executes the trade as instructed, which of the following best describes the IAR's compliance with fiduciary duty?
- AThe IAR has fulfilled their duty because the client explicitly directed the trade after being advised against it.
- BThe IAR is only partially compliant, as documenting the warning is not sufficient to absolve fiduciary responsibility.
- CThe IAR is in violation of their fiduciary duty to act in the client's best interest, regardless of client direction.
- DThe IAR is in violation if the trade results in a loss, but compliant if it results in a gain.
Show answer & explanationAnswer & explanation
Correct answer: C. The IAR is in violation of their fiduciary duty to act in the client's best interest, regardless of client direction.
Under fiduciary duty, an IAR must always act in the client's best interest. If a client insists on an unsuitable investment, even after being warned, the IAR should refuse to execute the trade. Executing an unsuitable trade, even when client-directed, is a breach of fiduciary duty.
Why the other options are wrong
- A. Client direction does not override the IAR's fiduciary duty to recommend and execute only suitable investments.
- B. Documentation is good practice but does not absolve the IAR of the primary duty to ensure suitability.
- D. Compliance with fiduciary duty is judged on the process and suitability at the time of the recommendation/execution, not on the outcome of the investment.
IAR Fiduciary Duty & Unsolicited Trades (Override)
An IAR's fiduciary duty to act in a client's best interest requires them to refuse to execute client-directed trades that are clearly unsuitable, even if the client insists after being warned.
- Fiduciary duty always prioritizes client's best interest.
- Unsuitable client-directed trades should be refused.
- Documenting warnings is important but does not absolve duty to refuse unsuitable trades.
Memory trick: Best interest first, even if client insists, a true fiduciary resists!