Duties to Clients - III(C) Suitability
In regards to III(C) Suitability, what three things should a member in an advisory relationship with a client find out?
1. The client's investment experience, risk and return objectives, and financial constraints.
2. If an investment is suitable to the client's situation and consistent with the client's written objectives, mandates, and constraints
3. If the investment is suitable in the context of the client's total portfolio
What investment recommendations and actions should a member make when he's responsible for managing a portfolio with a specific mandate, strategy, or style?
All investment recommendations and actions must be consistent with the states objectives and constraints of the portfolio.
a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations of issues involving issues of personal integrity
b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
If a client's investment matures or a new client is obtained, and the investment is first invested in some kind of cash equivalent, does the member need to immediately find out the investment objective and situation immediately?
No, the necessary information should be ascertained prior to investment recommendations or actions.
According to Standard III(C) Suitability, what two pieces of information need to be ascertained before any investment action is taken?
1. Determine the client's return objectives and level of risk tolerance
2. Know the client constraints: liquidity needs, expected cash flows, investable funds, time horizon, tax considerations, regulatory & legal circumstances
If you get a new client with an existing portfolio, are you required to change it as soon as it comes under your discretion?
No, it's best to take some time, plan, and implement actions in an organized way.
c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
Standard III(C) Suitability recommends that you create a written investment policy statement for your clients. What four items should be in this statement?
1. Client identification: Identify the type and nature of clients, and the existence of separate beneficiaries.
2. Investor objectives:
- Return objectives (income, growth in principal, maintenance of purchase power).
- Risk tolerance (suitability and stability of values).
3. Investor constraints: Liquidity needs, expected cash flows (patterns of additions and/or withdrawals), investable funds (assets and liabilities or other commitments), time horizon, tax considerations, regulatory and legal circumstances, investor preferences, circumstances, unique needs, and proxy voting responsibilities and guidance.
4. Performance measurement benchmarks.
How often should the client's objectives and constraints be reviewed to make sure it reflects the current circumstances?
Annual review is reasonable unless business or other reasons dictate more or less frequent review