Investment Advisor Fiduciary Duty and Ethics 1 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, an investment adviser has a fiduciary duty to act in the best interest of whom?
- The adviser's employer
- The client (Correct answer)
- The SEC
- The broker-dealer
Correct answer: The client
Investment advisers owe a fiduciary duty to their clients, requiring them to act in the client's best interest at all times.
Question 2: Which of the following best describes a conflict of interest for an investment adviser?
- Recommending low-cost index funds
- Receiving undisclosed compensation for recommending a specific fund (Correct answer)
- Charging a flat annual advisory fee
- Diversifying a client's portfolio
Correct answer: Receiving undisclosed compensation for recommending a specific fund
Receiving undisclosed compensation for recommending specific products creates a conflict of interest that must be disclosed to clients.
Question 3: An investment adviser who breaches their fiduciary duty by placing their own interests ahead of clients may be subject to what action?
- Only a verbal warning from the SEC
- Civil liability and potential regulatory sanctions (Correct answer)
- Mandatory retirement
- A tax penalty only
Correct answer: Civil liability and potential regulatory sanctions
Breaching fiduciary duty can result in civil lawsuits from clients and regulatory enforcement actions including fines and license revocation.
Question 4: The duty of loyalty under fiduciary standards requires an investment adviser to:
- Maximize commissions on each trade
- Avoid or disclose all conflicts of interest (Correct answer)
- Prioritize the adviser's firm revenue
- Follow all client instructions regardless of suitability
Correct answer: Avoid or disclose all conflicts of interest
The duty of loyalty requires advisers to avoid or fully disclose conflicts of interest so clients can make informed decisions.
Question 5: Which document is primarily used by registered investment advisers to disclose conflicts of interest, fees, and services to clients?
- Form 13F
- Form ADV Part 2 (Correct answer)
- Form U4
- Form BD
Correct answer: Form ADV Part 2
Form ADV Part 2 (the brochure) is the disclosure document investment advisers must provide to clients, covering fees, conflicts, and services.
Question 6: An investment adviser discovers a material error in a client's portfolio report. Ethical conduct requires the adviser to:
- Wait until the next quarterly review to mention it
- Immediately correct and disclose the error to the client (Correct answer)
- Delete the erroneous report and issue a new one silently
- Only disclose if the error favors the adviser
Correct answer: Immediately correct and disclose the error to the client
Ethical and fiduciary standards require prompt disclosure and correction of material errors that affect a client's investment decisions.
Investment Advisor Fiduciary Duty and Ethics 1
Under the Investment Advisers Act of 1940, an investment adviser has a fiduciary duty to act in the best interest of whom?