CFA Level II ExamEthical and Professional StandardsEasy
An investment adviser, Mark Johnson, CFA, manages a diversified portfolio for a retired couple. The couple's investment policy statement (IPS) clearly outlines a conservative risk tolerance, a primary objective of capital preservation, and a need for stable income. Mark recommends investing 25% of their portfolio in a new, high-yield emerging market bond fund that has a historical volatility significantly higher than their overall portfolio's target and pays a variable dividend. He justifies this recommendation by arguing that the fund offers superior income potential compared to traditional fixed-income options. Which CFA Institute Standard is Mark most likely violating?
- AStandard V(A) Diligence and Reasonable Basis
- BStandard III(C) Suitability
- CStandard VI(A) Disclosure of Conflicts
- DStandard I(A) Knowledge of the Law
Show answer & explanationAnswer & explanation
Correct answer: B. Standard III(C) Suitability
Mark's recommendation to invest in a high-yield, high-volatility emerging market bond fund for a conservative client focused on capital preservation and stable income directly contradicts the client's IPS. This is a clear violation of Standard III(C) Suitability, which requires ensuring investments are consistent with the client's objectives and constraints.
Why the other options are wrong
- A. Diligence and reasonable basis refer to the analyst's research, but even a well-researched unsuitable investment is still unsuitable.
- C. While there might be a conflict (e.g., higher commission), the fundamental issue is the unsuitability of the investment.
- D. This standard concerns adherence to laws and regulations, which isn't the primary ethical breach here.
Standard III(C) Suitability (Unsuitable Investment)
Members and Candidates must make reasonable efforts to ensure that investments are suitable for the client's financial situation and consistent with the client's written objectives and constraints.
- Understand client's risk tolerance, objectives, and constraints.
- Ensure investment recommendations align with the IPS.
- Avoid recommending investments that contradict client's stated needs.
Memory trick: Suitability: Match investments to client's needs, not just returns.