{"id":859,"date":"2019-07-12T17:36:00","date_gmt":"2019-07-12T17:36:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=859"},"modified":"2025-05-27T09:20:31","modified_gmt":"2025-05-27T09:20:31","slug":"standard-3c-suitability","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/ethical-and-professional-standards\/standard-3c-suitability\/","title":{"rendered":"Standard III(C) \u2013 Suitability"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Standard III \u2013 Duties to Clients and Prospective Clients (2025 LI CFA\u00ae Exam \u2013 Ethics\u2013Module 3)\",\n  \"description\": \"This video lesson covers Standard III: Duties to Clients from the CFA Level I Ethics curriculum. It explains loyalty, prudence, and care, fair dealing, suitability, performance presentation, and confidentiality. Real-life examples and exam-style questions help clarify ethical responsibilities in client relationships, investment decisions, and performance reporting.\",\n  \"uploadDate\": \"2022-08-24T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/coTBbAxXxTA\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=coTBbAxXxTA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/coTBbAxXxTA\",\n  \"duration\": \"PT29M09S\"\n}\n<\/script>\n\n\n\n<p>[vsw id=&#8221;coTBbAxXxTA&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<\/p>\n<p>Standard III(C) \u2013 Suitability refers to providing recommendations and transactions that align with a client\u2019s willingness and ability.<\/p>\n<h2>Compliance<\/h2>\n<p>The essence of Standard III(C) \u2013 Suitability lies in the notion that a client\u2019s objectives and financial circumstances are unique. For example, some may favor higher risk with the prospect of higher gains, while others desire to preserve what they have with moderate gains.<\/p>\n<p>CFA members are compelled to carefully consider each client&#8217;s needs and financial circumstances before making decisions on their behalf. The key to determining suitability is obtaining knowledge related to clients\u2019 experience with investments and their objectives.<\/p>\n<p>At the start of a client relationship, an investment professional collects information such as financial circumstances, age, profession, and attitudes toward risk. This information should be translated into a written investment policy statement (IPS) that outlines risk assessment, timeline, tax considerations, and unique circumstances.<\/p>\n<p>Each IPS should be updated annually, if not more frequently.\u00a0 Changes to an individual client\u2019s IPS may include increased or decreased income, change in the number of dependents, or adjusted attitude toward risk.\u00a0 Examples of IPS updates for institutional clients might be the number of unfunded liabilities in a pension fund, changes in withdrawal policies for employees, or adjustment to credit rating.<\/p>\n<h6 data-tadv-p=\"keep\">Categories:<\/h6>\n<ol style=\"margin-bottom: 15px;\">\n<li>Client Identification &#8211; Ex: type of clients, profession, list of individual beneficiaries<\/li>\n<li>Investor Objectives &#8211; Ex: investment objectives, risk tolerance<\/li>\n<li>Investor Constraints &#8211; Ex: liquidity needs, expected cash flows, time horizon, tax consideration, legal circumstances, investor preferences, proxy guidance<\/li>\n<li>Performance measurement benchmarks<\/li>\n<\/ol>\n<p><em>Note.<\/em> Adapted from <em>2017 CFA Curriculum (p. 135) <\/em>by CFA Institute, New York: 2017<\/p>\n<p>Generally speaking, diversification within client portfolios is the most suitable means of investment. Risks associated with individual security are limited when that security is bundled with other similar investments.<\/p>\n<p>Also related to risk assessment, a client may request a transaction outside the recommendation of an agreed-upon IPS.\u00a0 In these cases, a CFA member has the responsibility to explain risks associated with this investment and balance the portfolio to maintain client parameters.<\/p>\n<h2>Violation<\/h2>\n<p>An increase in legally required suitability tests should indicate that CFA members are obligated to adopt suitability policies. Beyond the analysis of possible return on investment, a member should investigate the impact of an investment on the overall portfolio diversification and the alignment of an investment with clients\u2019 risk tolerance.<\/p>\n<p>As an example of a possible violation, a manager of a high-income mutual fund should not invest in zero-dividend stock even if s\/he believes it to be undervalued unless the stock is within the excepted fund\u2019s mandate as made available within its disclosures.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>Abdul Mahjeed manages the portfolio of Anna Papazian, a wealthy client with whom he\u2019s had a professional relationship for more than a decade. Ms. Papazian receives regular communication from Mahjeed\u2019s firm indicating that she should contact her investment professional if there is a change in \u201clife-status.\u201d \u00a0Papazian has not contacted the firm, and Mahjeed has not spoken with her in more than two years. \u00a0Has Mahjeed fulfilled his obligation with respect to Standard III(C) \u2013 Suitability?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Mahjeed\u2019s long-standing relationship with Papazian makes him ideally suited to make relevant changes in his client\u2019s investment policy. Therefore, he is not in violation of Standard III(C) \u2013 Suitability.<\/li>\n<li data-tadv-p=\"keep\">Mahjeed\u2019s firm has maintained communication with Papazian, requesting information related to any change in life-status that may impact her portfolio. Therefore, the firm\u2019s burden of responsibility has been met.<\/li>\n<li data-tadv-p=\"keep\">Mahjeed is in violation of Standard III(C) \u2013 Suitability by not regularly assessing knowledge related to his client\u2019s current circumstances and objectives.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p>Standard III(C) \u2013 Suitability dictates that CFA members must update clients\u2019 IPS information at least every 12 months.\u00a0 Although Mahjeed has a long-standing client relationship with Papazian, he is not exempt from this duty.\u00a0 Furthermore, it is not incumbent upon the firm to ensure that clients communicate changes.\u00a0 Therefore, Mahjeed is in violation of Standard III(C) \u2013 Suitability.<\/p><\/blockquote>","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;coTBbAxXxTA&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] Standard III(C) \u2013 Suitability refers to providing recommendations and transactions that align with a client\u2019s willingness and ability. Compliance The essence of Standard III(C) \u2013 Suitability lies in the notion that a client\u2019s objectives&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3],"tags":[],"class_list":["post-859","post","type-post","status-publish","format-standard","hentry","category-ethical-and-professional-standards","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Standard III(C) \u2013 Suitability | CFA Level 1 Prep<\/title>\n<meta name=\"description\" content=\"Understand CFA Standard III(C) \u2013 Suitability. 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