Level 1 CFA® Exam Ethics, Standards V (B) & V (C)
Today’s lesson is about communication with clients (and prospective clients) on the one hand and retaining proper record on the other hand.
Making the Client Understand
Standard V (B): Communication with Clients and Prospective Clients requires that you communicate to the client all information important for him or her to make sensible investment decisions and to understand the whole investment process. Thus, when making an analysis or a recommendation, you must explain to your client how the process is arranged and what rules are applied to the process.
To give you an example, when communicating with your client, you should:
- include all factors relevant in an investment situation, and
- tell apart opinion from fact whenever necessary.
As far as factors are concerned you should present, e.g. the features of the assets analyzed in the report produced for the client.
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Forms of Communication
Your communication with the client may take different forms – from traditional conversations and written forms to more up-to-date and state-of-the-art forms of communication available to you and your client.
Forms of communicating with the client (examples):
- written reports,
- phone calls,
- e-mails,
- tete-a-tete conversations,
- talks via different video platforms or telecommunication applications, etc.
Examples on Communication
Assume that you are to give a recommendation of a security to your client. What should be included in such a recommendation apart from the recommendation per se?
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Now, let’s try to complicate the problem a bit and let’s suppose that the recommendation concerns a list of securities. In such a case, owing to the lengthy nature of the required information, you may not be able to present all the significant information within the limits of the recommendation. What then?
(...)
Standard V (C) requires that CFA members and candidates keep a record of their investment-related communication with clients (and prospective clients).
Documentation must be prepared thoroughly – it should support investment recommendations, analyses, and actions performed for the client and substantiate the relationship with the client. The particular form that the documentation should take depends on the specified services you provide to your clients.
Employer’s Responsibility
Generally, it is the responsibility of the firm to keep documentation and to do it in accordance with relevant laws, if applicable. Nevertheless, you must fulfill the duty on your part, as well.
Your Responsibility
The documentation you maintain should be comprehensive and it should be stored in such a way as to prevent it from getting lost (e.g. on the computer). Note, however, that you may keep your documents both in the electronic and printed version.
Additionally, you have to be aware that storing information on your computer requires special attention. We talked about it in our lesson on Standard III (E).
When you keep a record:
- be thorough,
- documentation you maintain should be comprehensive,
- store documents in such a way as to prevent them from getting lost,
- documentation is the property of your employer,
- you mustn’t make any copies to keep for yourself.
Employer’s Property
What is of key importance when talking about documentation is that all documents that you develop and keep are, in fact, the property of your employer (i.e. the firm you work for).
So, if you decide to leave your job and try your hand somewhere else, you will not be allowed to take your files with you, even though you are the author of the documents. When working for the firm, you provide service to the clients on behalf of the company and, that is why all the records stay with your employer.
If, however, your former employer expressively agrees that you may take the files with you, you may use them for your future professional activity. Otherwise, you will be allowed to use the information contained in your previous records only if you’ll be able to reproduce it from independent sources, which means you mustn’t make copies of the documents or restore information from your memory.
- Communicate to the (prospective) client all information important for him or her to make sensible investment decisions and to understand the whole investment process.
- Make sure your client can tell apart opinion from fact in your recommendation.
- Clients should also know where they can find more information about the investment process and investment products.
- Documentation must be prepared thoroughly and substantiate the relationship with the client.
- Generally, it is the responsibility of the employer to keep documentation and to do it in accordance with relevant laws, if applicable. Nevertheless, you must fulfill the duty on your part, as well.
CFA Exam: Communication with Clients and Prospective Clients
TYPES of DISCLOSURES related to CLIENT COMMUNICATION:
- BASIC FORMAT of how the investment processes look like for investment analysis, security selection, or portfolio construction,
- RISKS of the applied investment process that are known at the time of the investment action and deemed significant at the time of the disclosure,
- LEVERAGE is a particularly significant risk to be disclosed,
- RELEVANT FACTORS that can have a positive and negative influence on, e.g., a recommendation about an asset allocation strategy,
- FOLLOW-UP communication in the case of any significant changes in the risks or factors,
- OPINIONS such as statistical projections of future market prices to be distinguished from FACTS such as historical stock performance (omission of such disclosure may make clients unaware of the limits of the published projections),
- ASSUMPTIONS used in the investment models and processes applied to generate the investment analysis,
- EXTERNAL ADVISERS if the specialization or diversification expertise provided by external advisers is used while managing the client’s account,
- LIMITATIONS of a report if it includes only the elements important for the analysis and conclusions of the report and omits some other aspects deemed unimportant considering the nature of the report, e.g. a report on quarterly earnings can focus on earning but must address the limits to the scope of the report,
- REFERENCE MATERIAL for the investment advice based on quantitative research and analysis,
- CHANGES to previously applied methodology, products analyzed, or services provided.
WHY? TO MAKE CLIENTS:
- better understand the complexity of the investment industry, products, and services;
- realize how changes in the investment products or services can materially affect their investment objectives;
- more aware of the risks associated with investing and limits of the projections, strategies, or models used, etc.
CFA Exam: Record Retention
EXAMPLES of SUPPORTING DOCUMENTATION:
- personal notes from meetings with the client (both individual and corporate),
- press releases issued by the corporate client,
- computer-based model outputs and analyses,
- computer-based model input parameters,
- risk analyses showing how specific securities may impact the portfolio,
- selection criteria for external advisers,
- notes from clients from meetings held to review investment policy statements or explain the (in)compatibility of an investment with the client’s objectives,
- the client’s IPS,
- copies of secondary or third-party research done by other analysts,
- emails and text messages,
- blog posts, twitter posts, etc.