Chapter 9 Practice Question Answers
- 1. Answer: D. At its core, a fiduciary is a trusted professional expected to give advice and act in a way that is in the best interest of her client. Simply working for someone else or getting paid to give advice does not make someone a fiduciary. Rather, it is a unique expectation that is placed on financial professionals, defined by the fact that trust is placed in a person, regardless of how or if she is compensated. Lastly, fiduciaries are not expected to make as much profit as possible for each client, but rather, do what is most in line with each client’s objectives and risk tolerance.
- 2. Answer: A. Simply recommending a good thing to multiple clients is not a conflict of interest, but is more likely an expectation of a good investment adviser. However, recommending securities that the professional owns does create a conflict of interest, as does receiving a Wall Street Journal subscription paid for by a mutual fund vendor or recommending securities issued by a spouse’s employer. It’s important to note, however, that conflicts of interest do not by themselves prohibit a professional from acting, but rather require proper disclosure to the client or prospect.
- 3. Answer: A. Generally, whether the transaction was a principal or agency transaction has no bearing on whether or not a trade is considered excessive. However, the number of shares transacted by the client, the client’s investment objectives, and the amount of commission generated will all be considered when trying to decide if trading in a client’s account is excessive.
- 4. Answer: C. The only time an agent can borrow money from a non-family member client is when the client is actually in the business of lending money and the loan is an officially documented loan. This would most likely occur when the securities professional has a bank or other type of lender as a client. An investment adviser or IAR may only borrow money from clients