{"id":876,"date":"2019-07-12T17:36:00","date_gmt":"2019-07-12T17:36:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=876"},"modified":"2025-05-15T14:48:38","modified_gmt":"2025-05-15T14:48:38","slug":"standard-5b-communication-clients-prospective-clients","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/ethical-and-professional-standards\/standard-5b-communication-clients-prospective-clients\/","title":{"rendered":"Standard V(B) \u2013 Communication with Clients and Prospective Clients"},"content":{"rendered":"\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 lesson covers CFA Level 1 Ethics and Professional Standards, focusing on Standard V: Investment Analysis, Recommendations, and Actions. It explores diligence, reasonable basis, communication with clients, record-keeping practices, and the importance of separating fact from opinion in investment decisions, using practical examples and CFA Institute guidelines.\",\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<p>[vsw id=&#8221;oqaI3Wh6UDw&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<\/p>\n<p>Standard V(B) \u2013 Communication with Clients and Prospective Clients specifies that members must disclose the limitations and risks associated with investment recommendations and activities.<\/p>\n<p><!--more--><\/p>\n<h2>Compliance<\/h2>\n<p>Related to Standard III \u2013 Duties to Clients, Standard V(B) \u2013 Communication with Clients and Prospective Clients outlines the need for investment professionals to develop clear, frequent, and thorough communication practices. When clients and prospective clients understand the investment process and the actions of CFA members, they can make well-informed decisions.<\/p>\n<p>To this end, members are obliged to explain the process by which recommendations are made.\u00a0 This includes assumptions, limitations, and risks associated with these methods. For example, if an individual stock accounts for 40% of an investment portfolio, fluctuations in that security will have a much greater impact than if it made up only 2% of a diversified portfolio.<\/p>\n<p>Additionally, investment professionals are expected to outline risks associated with recommendations. Of course, as with any investment, there are inherent risks.\u00a0 That said, economic conditions, corporate liquidity, or volatility within an industry are specific risks that should be communicated to clients and prospective clients.<\/p>\n<p>The length of communication should be appropriate to the recommendation.\u00a0 For example, an\u00a0electronic communication that says little more than \u201cbuy\u201d or \u201csell\u201d should also include a reference to more detailed information available as a basis for making that recommendation. This allows clients to evaluate specifics should they desire to be more informed of the analysis behind a recommendation.<\/p>\n<h2>Violation<\/h2>\n<p>Violations often occur when thorough communication is not provided and when members fail to separate facts from opinions.\u00a0 Research-based on past circumstances can be verified as fact.\u00a0 However, projections of future performances are the basis of opinions.\u00a0 For example, an analyst may extrapolate the quantity of a natural resource-based on a limited sample (i.e., an overall reserve of platinum in a mine as inferred from core samples).\u00a0 This type of deduction cannot be proven as fact until the entire mine is quarried.\u00a0 Therefore, the extrapolation must be labeled as an opinion.<\/p>\n<p>Appropriate designation of each type of communication will prevent violation of Standard V(B) \u2013 Communication to Clients and Prospective Clients.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>Johnna Black is composing a communique to be sent to her clients.\u00a0 The subject of her writing is Tall Boys Grocer, whose earnings have increased each of the past four years by an average of 9.3%.\u00a0 Based on current research, Ms. Black projects that Tall Boys&#8217; earnings will increase by 10.6% in each of the next two years.<\/p>\n<p>Black will violate Standard V(B) \u2013 Communication with Clients and Prospective Clients if she states the following:<\/p>\n<p>I. Tall Boys Grocer\u2019s earnings will grow 10.6% in each of the next two years<\/p>\n<p>II. Tall Boys earning have been compounding at approximately 9.3% annually<\/p>\n<p>III. I expect the earnings of Tall Boys Grocer to increase by 10.6% each year for the next two years.<\/p>\n<p>A. I only<\/p>\n<p>B. I &amp; II only<\/p>\n<p>C. I &amp; III only<\/p>\n<h5 data-tadv-p=\"keep\">Solution<\/h5>\n<p>The correct answer is A.<\/p>\n<p>Johnna Black\u2019s projection of growth is opinion vs. fact.\u00a0 Therefore, it must be stated as such.\u00a0 If she makes a simple statement of \u201cTall Boys Grocer\u2019s earnings will grow 10.6% in each of the next two years\u201d then she is guaranteeing a growth outcome and is in violation of Standard V(B) \u2013 Communication with Clients and Prospective Clients.<\/p><\/blockquote>","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;oqaI3Wh6UDw&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] Standard V(B) \u2013 Communication with Clients and Prospective Clients specifies that members must disclose the limitations and risks associated with investment recommendations and activities.<\/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-876","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(B) \u2013 Client Communication | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn the importance of clear, transparent client communication, including risk disclosures and investment recommendation limitations.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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