NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesMedium
A client approaches their Investment Adviser Representative (IAR) with a request to invest a significant portion of their portfolio in a single, highly speculative penny stock. The IAR conducts due diligence and determines that the investment is clearly unsuitable for the client's financial situation, risk tolerance, and investment objectives. What is the IAR's most appropriate course of action?
- AExecute a smaller portion of the requested trade to mitigate risk, then monitor the investment closely.
- BRefuse to execute the trade and explain the reasons for unsuitability to the client.
- CExecute the trade as requested by the client, as they have the final say in their investment decisions.
- DExecute the trade after obtaining a signed waiver from the client acknowledging the unsuitability.
Show answer & explanationAnswer & explanation
Correct answer: B. Refuse to execute the trade and explain the reasons for unsuitability to the client.
An IAR has a fiduciary duty to act in the client's best interest. If an investment is determined to be unsuitable, the IAR must refuse to execute the trade and explain why, even if the client insists.
Why the other options are wrong
- A. Executing even a smaller portion of an unsuitable trade still violates the IAR's fiduciary duty.
- C. Executing an unsuitable trade, even at the client's request, is a violation of the IAR's fiduciary duty.
- D. A signed waiver does not absolve the IAR of their responsibility to ensure suitability under fiduciary standards.
Refusal of Unsuitable Trades (IAR)
An IAR's ethical and legal obligation to decline executing client-requested trades deemed unsuitable for their financial profile.
- Supersedes client's direct instruction when suitability is violated.
- Requires clear explanation of unsuitability to the client.
- A core component of the fiduciary duty of care and loyalty.
Memory trick: When a client pushes for a bad path, you must be the brakes.