An investment adviser representative (IAR) at a state-registered firm has a client who consistently insists on making speculative investments that are clearly unsuitable for their stated risk tolerance and financial situation. The IAR has repeatedly advised against these trades, documenting these recommendations and the client's insistence. If the IAR executes these trades as directed by the client, what is the IAR's most appropriate course of action to fulfill their fiduciary duty?
- AExecute the trades only after obtaining a written statement from the client acknowledging the unsuitability and overriding the IAR's advice.
- BExecute the trades and contact the state administrator to report the client's persistent unsuitable requests.
- CExecute the trades as directed, as the client has ultimate control over their account.
- DRefuse to execute the trades and terminate the advisory relationship with the client.
Show answer & explanationAnswer & explanation
Correct answer: A. Execute the trades only after obtaining a written statement from the client acknowledging the unsuitability and overriding the IAR's advice.
While an IAR has a fiduciary duty to recommend suitable investments, clients ultimately control their accounts. If a client insists on an unsuitable trade against advice, the IAR should execute it only after documenting their advice and obtaining a written acknowledgment from the client that they are overriding the IAR's recommendation and understand the risks. Refusing to execute might violate the client's right to control their account, and reporting to the administrator is not the first or most appropriate step.
Why the other options are wrong
- B. Reporting the client to the administrator for merely insisting on trades (even unsuitable ones) is not typically required or appropriate; this is a client decision, not a regulatory violation by the client.
- C. Executing without proper documentation of the client overriding advice could still leave the IAR liable.
- D. Refusing to execute a client's direct order (after proper disclosure and documentation) can be seen as violating the client's control over their assets, and termination is an extreme measure not always necessary.
Client-Directed Unsuitable Trades
If a client insists on executing an investment that is unsuitable for them, against the IAR's advice, the IAR should execute the trade but must obtain a written acknowledgment from the client that they are overriding the IAR's recommendation and understand the risks.
- IAR's primary duty is suitability and client's best interest.
- Clients have ultimate control over their accounts.
- Documentation of advice and client's override is crucial for IAR protection.
- A 'hold harmless' letter or similar acknowledgment is often used.
Memory trick: Advise, document, then let the client decide, with a written 'override' to abide.