NASAA Series 63Ethical Practices and ObligationsMedium
A client calls their investment adviser representative (IAR) and explicitly states, 'I need to consolidate my portfolio. Sell all my shares of Company X and use the proceeds to purchase shares of Company Y. Do this immediately.' The IAR believes Company X is undervalued and Company Y is overvalued. Without contacting the client again, the IAR sells only half of Company X's shares and puts the proceeds into a money market fund, planning to wait for a better entry point for Company Y. Which unethical practice has the IAR committed?
- AUnauthorized trading.
- BSuitability violation.
- CFailure to follow client instructions.
- DChurning.
Show answer & explanationAnswer & explanation
Correct answer: C. Failure to follow client instructions.
The client provided clear and explicit instructions for specific actions. The IAR, despite their personal opinion, deviated from these instructions without client approval. This is a direct failure to follow client instructions, even if the IAR believes it's for the client's benefit.
Why the other options are wrong
- A. While the IAR made unauthorized *decisions*, the primary violation is not following the client's explicit order, which is 'failure to follow instructions'.
- B. The suitability of the client's original request is not the issue; the violation is the IAR's deviation from instructions.
- D. Churning involves excessive trading for commissions, which is not the core issue here.
Failure to Follow Client Instructions
The unethical and often illegal act of a financial professional not executing a client's specific, clear, and lawful orders as directed, regardless of the professional's personal judgment about the order's prudence.
- Must execute clear client orders.
- Applies to non-discretionary accounts.
- Personal opinion of agent doesn't override instructions.
Memory trick: When the client speaks, the agent acts, no second guessing.