Advice to Client Standard of Care

Lesson

The standard of care that investment advisers must adhere to when providing advice to clients includes understanding the client's financial situation, investment objectives, and risk tolerance, as well as providing suitable investment recommendations and acting in the client's best interest.

Practice Question #1

Which of the following is NOT a component of the standard of care for investment advisers?

A) Understanding a client's financial situation

B) Recommending suitable investments

C) Ensuring a client's portfolio outperforms the market

D) Acting in the client's best interest

Select an option above to see an explanation here.

A) Understanding a client's financial situation is a critical component of the standard of care. B) Recommending suitable investments is a critical component of the standard of care. C) Ensuring a client's portfolio outperforms the market is not a standard of care requirement, as investment advisers cannot guarantee investment performance. D) Acting in the client's best interest is a critical component of the standard of care.

Terms

Fiduciary Duty:: The legal obligation to act in the best interest of another party.
Standard of Care:: The degree of care and caution required of an investment adviser when advising clients.

Practice Question #2

Which of the following is NOT a factor that an investment adviser should consider when determining the suitability of an investment recommendation?

A) The client's investment objectives

B) The client's risk tolerance

C) The client's age

D) The investment adviser's personal opinion of the investment

Select an option above to see an explanation here.

A) The client's investment objectives are a critical factor in determining the suitability of an investment recommendation. B) The client's risk tolerance is a key factor in determining the suitability of an investment recommendation. C) The client's age is a relevant factor in determining the suitability of an investment recommendation, as it may impact their investment time horizon and risk tolerance. D) The investment adviser's personal opinion of the investment should not be the primary factor in determining the suitability of an investment recommendation, as the adviser must act in the client's best interest and consider the client's unique financial situation and goals.

Real-World Example

An investment adviser meets with a new client nearing retirement with a low-risk tolerance. The adviser takes the time to understand the client's financial situation, investment objectives, and risk tolerance and recommends a diversified portfolio of conservative investments, such as bonds and dividend-paying stocks. This recommendation suits the client's needs and demonstrates the adviser's adherence to the standard of care.

Practice Question #3

What is the primary fiduciary duty of an investment adviser when providing advice to a client?

A) Maximize profits

B) Minimize risk

C) Act in the client's best interest

D) Provide the lowest fees

Select an option above to see an explanation here.

A) Maximizing profits is important, but it is not the primary fiduciary duty. B) Minimizing risk is important, but it is not the primary fiduciary duty. C) Acting in the client's best interest is the primary fiduciary duty of an investment adviser. D) Providing the lowest fees is important, but it is not the primary fiduciary duty.