AIP Client Advisory & Ethical Practices 4 — Questions and Answers
Question 1: A wealthy client asks an advisor to structure investments to minimize tax reporting obligations in ways the advisor believes may be illegal. The advisor should:
- Follow the client's instructions since the client bears ultimate legal responsibility
- Refuse to implement the strategy and advise the client to seek legal counsel (Correct answer)
- Implement the strategy if the client signs a liability waiver
- Report the client to the IRS immediately without further discussion
Correct answer: Refuse to implement the strategy and advise the client to seek legal counsel
Advisors must refuse to participate in strategies they believe are illegal and direct clients to appropriate legal counsel.
Question 2: Under the CFA Institute Code of Ethics (which informs AIP standards), the term 'independence and objectivity' primarily means that investment professionals must:
- Avoid managing portfolios with any client input to maintain professional objectivity
- Not accept gifts or compensation that could compromise their investment judgment (Correct answer)
- Operate independently from regulatory oversight where professional judgment applies
- Maintain separate offices from other financial service providers
Correct answer: Not accept gifts or compensation that could compromise their investment judgment
Independence and objectivity requires that advisors avoid any compensation or relationships that could bias their professional judgment.
Question 3: An AIP advisor serves on the board of a public company. When advising clients on whether to invest in that company, the advisor MUST:
- Recuse themselves entirely from any discussion about that company with clients
- Disclose the board membership and any material non-public information constraints before advising (Correct answer)
- Provide advice freely since board experience gives superior insight into the company
- Limit recommendations about the company to institutional clients only
Correct answer: Disclose the board membership and any material non-public information constraints before advising
Advisors with potential conflicts of interest must disclose those conflicts to clients and manage information barriers appropriately.
Question 4: A client's risk profile questionnaire indicates moderate risk tolerance. Which portfolio allocation MOST aligns with a suitability determination for this client?
- 100% U.S. Treasury bills
- A diversified mix of 60% equities and 40% fixed income (Correct answer)
- 100% technology sector growth stocks
- 75% alternative investments and 25% cash
Correct answer: A diversified mix of 60% equities and 40% fixed income
A balanced 60/40 portfolio of diversified equities and fixed income is the classic moderate-risk allocation aligning with moderate risk tolerance.
Question 5: A client threatens to withdraw assets if the advisor does not recommend a speculative investment the advisor believes is unsuitable. The advisor's BEST course of action is to:
- Make the recommendation to retain the client and document that it was client-directed
- Explain the suitability concerns, document the discussion, and refuse the unsuitable recommendation (Correct answer)
- Make a partial recommendation for a smaller amount as a compromise
- Transfer the client to a colleague who may be willing to make the recommendation
Correct answer: Explain the suitability concerns, document the discussion, and refuse the unsuitable recommendation
Client pressure, even including the threat of account closure, does not justify making unsuitable recommendations; the advisor must document and decline.
Question 6: Which of the following actions BEST demonstrates an advisor's duty of care to clients?
- Recommending the advisor's firm's highest-margin products to maximize client service resources
- Conducting thorough due diligence on investment recommendations and monitoring client portfolios (Correct answer)
- Limiting client contact to annual reviews to avoid over-managing client expectations
- Delegating all investment research to third-party services without independent review
Correct answer: Conducting thorough due diligence on investment recommendations and monitoring client portfolios
Duty of care requires advisors to diligently research recommendations and continuously monitor client portfolios against stated objectives.
Question 7: Under AIP ethical standards, which action by an advisor would constitute a violation of client confidentiality?
- Sharing client information with a regulatory body pursuant to a lawful subpoena
- Discussing a client's portfolio details with a colleague to obtain a second opinion without client consent (Correct answer)
- Providing client records to the firm's compliance department during an internal audit
- Disclosing client information as required under anti-money laundering reporting obligations
Correct answer: Discussing a client's portfolio details with a colleague to obtain a second opinion without client consent
Sharing client details with colleagues without client consent for non-compliance purposes violates confidentiality obligations.
AIP Client Advisory & Ethical Practices 4
A wealthy client asks an advisor to structure investments to minimize tax reporting obligations in ways the advisor believes may be illegal.
The advisor should: