Ethical and Compliance Considerations

Ethical and Compliance Considerations

The CFA Institute Code of Ethics and Standards of Professional Conduct are great places for investment professionals and candidates to begin building their knowledge of ethics for finance. This section focuses on the unique considerations of private wealth management.

Fiduciary Duties

Fiduciary duty refers to the placing of client interests above those of the wealth manager in all cases. In some jurisdictions this may be a legal responsibility. It is considered the highest form of client care in the industry. Wealth managers should also be aware of suitability considerations in private wealth management scenarios. Suitability is explained by Standard III(C): Suitability; and Standard V(A): Diligence and Reasonable Basis in detail. Suitability refers to careful selection of investments which fulfill the needs of the clients, without compromising any of the constraints contained in the IPS.

Know Your Customer

This concept refers to proper collection of information about clients. This serves not only to achieve the best possible results for the investment management program, but can also serve to protect society against white collar crimes such as money laundering, for example.

Confidentiality

Wealth managers must not divulge sensitive information about clients. Standard III(E): Preservation of Confidentiality describes the nuances of this duty in detail.

Conflicts of Interest

In the context of private wealth, conflicts of interest often arise as a result of the wealth manager's compensation structure. Managers who are compensated in the form of commissions may be incentivized to recommend products which offer them the highest commission rewards, rather than those that are ideal for the clients. A percentage of AUM fee may also incentivize managers to discourage clients from withdrawing funds from the program, or potentially taking on more risk than is reasonable for the client, in order to increase or maintain AUM.

Question

Sven-Erik Stenholm has just hired a wealth manager to assist him in protecting and growing his vast fortune, a legacy which his grandfather began in the late 1800's on a small pine logging farm. Sven-Erik has had investment advice in various forms before but has just recently been prompted by a work colleague to look into a wealth management firm, Johansen Asset Management (“JAM”). JAM charges a fee of 1.2% of Assets Under Management (“AUM”), and earns referral fees related to a bevy of legal, tax, and estate professionals recommended by JAM. Which of the following is least likely to be a relevant conflict of interest in this situation?

  1. JAM may sell high-commission products to Sven-Erik.
  2. JAM may dissuade Sven-Erik from withdrawing funds.
  3. JAM may refer sub-optimal estate advisors.

Solution

The correct answer is C.

It is the least likely relevant conflict of interest. While referring sub-optimal estate advisors is not in Sven-Erik's best interest, it's not a direct financial conflict of interest for JAM, as they are not earning additional income from Sven-Erik by referring these advisors.

A and B are incorrect. Choices A and B involve financial conflicts of interest that have the potential to directly benefit JAM at the expense of Sven-Erik's financial well-being.

Portfolio Construction: Learning Module 4: Overview of Private Wealth Management; Los 4(o) Discuss ethical and compliance considerations in advising private clients

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    2021-02-18
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    2021-02-13
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    2021-01-27
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    2021-01-14
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    2021-01-07
    Crisp and short ppt of Frm chapters and great explanation with examples.