CFA Exam & Standard III: DUTIES TO CLIENTS
Level 1 Ethics Summarized: Each ethical standard is devoted to a separate area of expertise. Standard III describes Duties to Clients. Its sub-sections deal with: (A) Loyalty, Prudence, and Care, (B) Fair Dealing, (C) Suitability, (D) Performance Presentation, and (E) Preservation of Confidentiality.
This blog post was created as a part of the CFA exam review series to help you in your level 1 exam revision, whether done regularly or shortly before your CFA exam.
CFA Exam: Standard III (A) – Loyalty, Prudence and Care
Standard III (A) sets out common guidelines to be followed with regard to relationships with clients.
As a CFA member or candidate, you must preserve loyalty in relationships with your clients and base actions on prudence and reasonable care. According to the CFA Institute Code and Standards, you are always obliged to act to the benefit of your clients and to ensure that their interests are of the paramount importance.
Clients should be always given professional and loyal assistance in their investment actions and that is your responsibility to ensure that they really are.
You can learn more about CFA Institute Code of Ethics & Standards of Professional Conduct by visiting our CFA exam lesson on Ethics, Standard III .
CFA Exam: Standard III (B) – Fair Dealing
The main idea behind Standard III (B) is that you are always obliged to provide fair and impartial service to all of your clients, which means that you must not favour one client over the other.
The provisions of Standard III (B) account for the possibility that services provided to various clients may differ, but it also states that these differences in service provided by the professional should be known to all clients, and not only to the selected group of clients.
When an investment recommendation is given, you should make sure that information will be disseminated to all of your clients simultaneously. Although it is not possible to reach each and every client at the same time, you should make sure that no selective or discriminatory disclosure takes place when recommendation or any other investment information is spread.
Level 1 Ethics Question: Standard III
Ethics Question: Standard III
New Obligations and Checks Co. is a large brokerage company. Loren Ipsen, a CFA candidate and an independent portfolio manager, often handles her trading activities through the brokerage because she is frequently given more beneficial prices when she places her orders with Derek Doe, a broker in New Obligations and Checks Co. and an old acquaintance of hers. In order to be in compliance with Standard III (A), it is most likely that Loren should:
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CFA Exam: Standard III (C) – Suitability
Whenever you find yourself in an advisory relationship with your client, you will be obliged to create a document referred to as an Investment Policy Statement (IPS). IPS is a document of high significance both to you and to your client and it is required that every client has his or her Investment Policy Statement.
The IPS should outline:
- the financial situation of the client,
- his or her personal data important from the point of view of making investment decisions (e.g. age and occupation),
- the client’s risk tolerance,
- his or her investment objectives (e.g. return requirements or liquidity needs),
- investment constraints (e.g. time horizon, tax concerns, liquidity needs, legal and regulatory aspects or any unique circumstances).
Moreover, the IPS should:
- state any formal obligations between the parties, namely their roles and responsibilities,
- regulate an obligation to review and evaluate the IPS at specified periods,
- have a written form and be regularly updated, at least once a year.
When making decisions concerning the suitability of a given investment recommendation or action, apart from the investor’s characteristics also the structure of portfolio is important. What it means is that the portfolio should be diversified – it reduces the level of risk associated with investing. As far as investment risk is concerned, it should be carefully judged by professionals staying in advisory relationships with clients.
CFA Exam: Standard III (D) – Performance Presentation
Investment performance has to be presented to clients in a credible way. No misrepresentation or selection of information is allowed. To comply with Standard III (D), CFA members and candidates are encouraged to follow the Global Investment Performance Standards (GIPS).
Still, it is also possible to remain in compliance with the Standard without the strict adherence to the GIPS standards. Then, it is necessary to follow some generally accepted principles, such as including closed accounts in performance measurement and presentation or explaining the methodology of performance presentation, e.g. stating that the presentation takes the form of a simulation.
To quote the CFA Institute Code and Standards, performance information must be fair, accurate and complete. It concerns both individual and pooled accounts. It is your duty to ensure that your performance is always adequately presented – both to your clients and to your prospective clients.
CFA Exam: Standard III (E) – Preservation of Confidentiality
In an advisory relationship with the client, you will often receive some private or otherwise special information from the client. In such cases, you are obliged to maintain the confidentiality of information regardless of whether you are still working for the client, whether you ended working for the client or whether it is your prospective client.
To remain in compliance with Standard III (E), it would be best not to disclose any of the information received from clients unless this information is shared with a clear aim to benefit the client.
There is a number of situations, however, that require that the obligation to remain confidential is compromised. These are:
- when your client is somehow associated with an illegal activity,
- when the law states clearly that information must be revealed,
- when your client consents that you disclose certain information.
In these situation you either may or are obliged to give information that you must otherwise keep secret and confidential.
LAST UPDATE: 5 April 2022