Chapter 5 Practice Question Answers
1. Answer: A. A firm or professional may theoretically charge both a commission and a fee to a client, but this fact needs to be disclosed to the client in writing. Professionals are not required to choose the compensation arrangement that results in the lowest overall cost, as long as the compensation arrangement chosen is in the client’s best interest.
2. Answer: B. When a client is charged more than other clients for the same or similar services, his fee is most likely unreasonable. However, since most clients would always prefer a lower fee, their opinion of a fee is not a great measure of its reasonableness. Likewise, the portion of a fee the IAR or agent keeps after his or her firm takes their cut and the length of a relationship are not good measures of whether or not a fee is unreasonable.
3. Answer: A. Receiving compensation related to an account that wasn’t initially disclosed to a client requires a new disclosure of that fact in writing. Neither receiving broad-based bonuses that do not create conflicts of interest nor sharing compensation with another licensed professional would require a separate written disclosure. Splitting compensation with an unlicensed professional is prohibited in general, regardless of whether or not a disclosure is made.
4. Answer: B. Anytime a professional receives services from a broker who also provides services to her clients, it is considered a soft-dollar arrangement and can result in a conflict of interest.
5. Answer: C. Research services, software for analysis, and electronic data subscriptions are all acceptable soft-dollar arrangements. Computer hardware, furniture, and clerical services are not allowed as soft-dollar arrangements.
6. 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