{"id":874,"date":"2019-07-12T17:36:00","date_gmt":"2019-07-12T17:36:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=874"},"modified":"2025-12-29T22:06:58","modified_gmt":"2025-12-29T22:06:58","slug":"standard-5a-diligence-reasonable-basis","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/ethical-and-professional-standards\/standard-5a-diligence-reasonable-basis\/","title":{"rendered":"Standard V(A) \u2013 Diligence and Reasonable Basis"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Do Dade and Gad have a reasonable basis for their investment recommendations under Standard V(A)?\",\n    \"text\": \"Michael Dade and Ron Gad, both CFA members, are financial advisors at Centerville Investments. Dade recommends that one of his clients buy Z-Co based on research conducted by his firm. Gad recommends that one of her clients sell Z-Co based on research conducted by a different brokerage firm for general distribution. Both recommendations are consistent with each client\u2019s investment objectives and within the context of their entire portfolios. Neither Dade nor Gad has reason to suspect that any information in the research reports is inaccurate or inadequately supported. According to Standard V(A) \u2013 Diligence and Reasonable Basis, do Dade and Gad have a reasonable basis for making their investment recommendations? A. Both of these advisors have a reasonable basis for their recommendations. B. Only one of these advisors has a reasonable basis for his or her recommendation. C. Neither of these advisors has a reasonable basis for their recommendations.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. Both Dade and Gad have a reasonable basis for their recommendations because they rely on research they reasonably believe to be sound, and their recommendations are consistent with each client\u2019s objectives and overall portfolio context, in line with Standard V(A) \u2013 Diligence and Reasonable Basis.\"\n    }\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Standard V \u2013 Investment Analysis, Recommendations, and Action (2025 Level I CFA\u00ae Exam \u2013 Module 3)\",\n  \"description\": \"This video covers CFA Level 1 Ethics Standard V, focusing on Investment Analysis, Recommendations, and Actions. It explains the importance of diligence, reasonable basis, and proper communication when making investment recommendations. The lesson highlights the need for thorough research, understanding quantitative models, educating clients, clear record-keeping, and distinguishing between facts and opinions. It ends by emphasizing regular updates to clients and maintaining compliance through proper documentation and transparency.\",\n  \"uploadDate\": \"2022-08-26T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/oqaI3Wh6UDw\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=oqaI3Wh6UDw\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/oqaI3Wh6UDw\",\n  \"duration\": \"PT28M01S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/oqaI3Wh6UDw?si=W3Kl1xtcivGwWzTo\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<h2>V. Investment Analysis, Recommendations, and Action<\/h2>\n<p>Standard V outlines the responsibility of investment professionals regarding the performance of due diligence before making recommendations to clients.<\/p>\n<p><!--more--><\/p>\n<h2>Standard V(A)<\/h2>\n<p>Standard V(A) \u2013 Diligence and Reasonable Basis informs that recommendations be made based on a firm\u2019s independent research or the quantitative research of other reputable sources.<\/p>\n<h2>Compliance<\/h2>\n<p>A reasonable basis is formed through the balanced use of quantitative study, third-party research, and company reports. Due diligence assumes a thorough study of numerous reputable sources of information before making recommendations.\u00a0 The intent of Standard V(A) \u2013 Diligence and Reasonable Basis are to prevent conjecture in the form of a \u201chot tip.\u201d<\/p>\n<p>A partial list of examples of reasonable sources to be studied before making an investment recommendation include the following:<\/p>\n<ol>\n<li>Global, regional, and national economic conditions<\/li>\n<li>A company\u2019s operating and financial history<\/li>\n<li>Current conditions within an industry or sector.<\/li>\n<li>Mutual funds\u2019 fee structure and management history<\/li>\n<li>Results and limitations of quantitative models<\/li>\n<li>Quality of assets within a security<\/li>\n<li>Fitness of chosen peer-group comparisons<\/li>\n<\/ol>\n<p>When considering any source of research, it is necessary to consider limitations and assumptions made by the author and potential biases. For example, with the popularity of social media, it may be tempting to utilize investment blogs as research tools for making recommendations.\u00a0 Even if a blogger is a CFA member, investment professionals are obliged to consider the limitations of references cited within a blog and the impact of incorporating this information on overall advice.<\/p>\n<p>With regard to choosing an external advisor to manage certain asset classes or diversification strategies, the member must use reasonable care and diligence in choosing advisors. This includes reviewing external partners\u2019 code of ethics and compliance procedures. It should also include a review of the quality of partners\u2019 published information and its consistency of investment strategy.<\/p>\n<h2>Violation<\/h2>\n<p>To prevent a violation, firms should require that research reports, recommendations, and ratings have a basis that can be referenced as extensive and acceptable. This may be done by creating measurable parameters for establishing compliance with Standard V(A) \u2013 Diligence and Reasonable Basis.<\/p>\n<p>Additionally, firms should have a policy for evaluating external advisors\u2019 credentials before contracting with these partners.\u00a0 A periodic review of the quality of the information provided by the firm will encourage the accuracy and thoroughness of the information provided over time.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>Michael Dade and Ron Gad, both CFA members, are financial advisors at Centerville Investments. Dade recommends that one of his clients buy Z-Co based on research conducted by his firm. Chavis recommends that one of her clients sell Z-Co based on research conducted by a different brokerage firm for general distribution.<\/p>\n<p>Both recommendations are consistent with each client\u2019s investment objectives and within the context of their entire portfolios. Neither Dade nor Gad has a reason to suspect that any information contained in the research reports from these two sources is inaccurate or inadequately supported. According to Standard V(A) \u2013 Diligence and Reasonable Basis, do Dade and Gad have a reasonable basis for making their investment recommendations?<\/p>\n<p>A. Both of these advisors have a reasonable basis for their recommendations.<\/p>\n<p>B. Only one of these advisors has a reasonable basis for his or her recommendation.<\/p>\n<p>C. Neither of these advisors has a reasonable basis for their recommendations.<\/p>\n<h5 data-tadv-p=\"keep\">Solution<\/h5>\n<p>The correct answer is A.<\/p>\n<p>Both Dade and Gad have practiced due diligence and made reasonable recommendations, in accordance with Standard V(A) \u2013 Diligence and Reasonable Basis so long as their reports are believed to be inclusive of accurate and adequate information, and investment recommendations are made in alliance with clients\u2019 objectives.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>V. Investment Analysis, Recommendations, and Action Standard V outlines the responsibility of investment professionals regarding the performance of due diligence before making recommendations to clients.<\/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-874","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 V(A) \u2013 Diligence &amp; Reasonable Basis | CFA Level 1<\/title>\n<meta name=\"description\" content=\"CFA members must ensure investment recommendations are based on thorough research, independent analysis, or credible third-party 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