Discretion refers to the authority granted by a client to an investment adviser to make investment decisions on their behalf without obtaining prior consent for each transaction. This authority must be granted in writing and is subject to various regulations and ethical practices to protect client interests.
Which of the following best describes discretion in the context of client funds and securities?
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A) Discretion refers to the authority granted by a client to an investment adviser to make investment decisions on their behalf without obtaining prior consent for each transaction. B) Suitability requires that investment recommendations be appropriate for the client's financial situation, objectives, and risk tolerance. C) Segregation separates client assets from the investment adviser's assets. D) Trade allocation is allocating investment opportunities among clients fairly and equitably.
What is the primary legal obligation of an investment adviser when managing a discretionary account?
A) While generating returns is an important goal, the primary legal obligation of an investment adviser is to act in the best interests of their clients. B) Fiduciary duty is an investment adviser's legal obligation to act in their clients' best interests. C) Minimizing tax liability may be a consideration, but it is not the primary legal obligation. D) Avoiding conflicts of interest is important, but the primary legal obligation is to act in the client's best interests.
An investment adviser with discretion over a client's account may decide to sell a stock that has reached its target price and use the proceeds to purchase a bond that offers attractive income potential. The adviser makes this decision based on their analysis of the client's portfolio and the current market conditions without consulting the client for approval.
Which of the following is an unethical practice in the context of discretionary accounts?
A) Allocating trades fairly among clients is an ethical practice. B) Using soft dollars to obtain research services is generally acceptable if it benefits the client. C) Churning client accounts to generate commissions is unethical, as it prioritizes the adviser's interests over the client's. D) Obtaining written authorization for discretionary authority is a regulatory and ethical practice requirement.
- Activities permitted with limited discretion: These are actions that an investment adviser can take on behalf of a client without obtaining specific consent for each transaction, but within certain boundaries set by the client. - Activities disallowed with limited discretion: These are actions that an investment adviser cannot take on behalf of a client without obtaining specific consent for each transaction, even if they have limited discretion. - Activities permitted with full discretion: These are actions that an investment adviser can take on behalf of a client without obtaining specific consent for each transaction, as they have been granted full discretion by the client. - Activities disallowed with full discretion: These are actions that an investment adviser cannot take on behalf of a client, even if they have been granted full discretion, due to legal or regulatory restrictions.
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Example Series 65 Example Practice Question
- Activities permitted with limited discretion example: An investment adviser can buy or sell securities within a specific asset class as long as they stay within the client's risk tolerance and investment objectives. - Activities disallowed with limited discretion example: An investment adviser cannot withdraw funds from a client's account or change the client's investment objectives without obtaining specific consent. - Activities permitted with full discretion example: An investment adviser can buy or sell securities, change asset allocations, and make other investment decisions without obtaining specific consent from the client. - Activities disallowed with full discretion example: An investment adviser cannot engage in self-dealing, such as buying securities from their own account and selling them to the client's account at a higher price.