CFA Level II ExamEthical and Professional StandardsEasy
An independent financial advisor, Emily White, CFA, is preparing to assume responsibility for a new institutional client's portfolio. The client, a pension fund, has a very detailed investment policy statement (IPS) that outlines specific asset allocation ranges, acceptable security types, and risk tolerance. Emily reviews the IPS and notices that a significant portion of the fund's current holdings, inherited from the previous advisor, falls outside the stipulated asset allocation ranges. What is Emily's most appropriate first action under the CFA Institute Standards of Professional Conduct?
- ALiquidate all non-compliant holdings and reinvest in suitable assets.
- BDocument the discrepancies and discuss a plan of action with the client.
- CInform the previous advisor of the non-compliant holdings and request their justification.
- DImmediately begin rebalancing the portfolio to bring it into compliance with the IPS.
Show answer & explanationAnswer & explanation
Correct answer: B. Document the discrepancies and discuss a plan of action with the client.
Before taking any action that impacts the client's portfolio, Emily must discuss the non-compliant holdings with the client. This fulfills her duty under Standard III(C) Suitability and ensures the client is aware of the situation and agrees to the proposed rebalancing plan. Immediate rebalancing without client consultation could be a breach of trust.
Why the other options are wrong
- A. Liquidating holdings immediately without client discussion could incur unnecessary transaction costs or tax implications and is not prudent.
- C. The previous advisor's actions are not Emily's primary concern; her duty is to her new client.
- D. Rebalancing without client discussion is premature and could be against the client's immediate wishes or best interest.
Standard III(C) Suitability (Client Actions)
Members and Candidates must make reasonable efforts to ensure investments are suitable for a client's financial situation and consistent with their written objectives and constraints, including the IPS.
- Understand client's IPS thoroughly.
- Ensure current holdings and future recommendations align with IPS.
- Address any discrepancies with the client before taking action.
Memory trick: Manage portfolios with Suitability and Client Communication.