Standard I (E) Competence

Brief Introduction on the Standards

Guidance Standard I(E) mandates that members and candidates must act with and maintain appropriate knowledge, skills, and diligence while performing their professional responsibilities. This is essential to deliver a high standard of service to clients and employers. The Code of Ethics further demands adherence to integrity, competence, and diligence, and requires continuous improvement in professional competence, including helping other investment professionals enhance their skills. Given the diverse professional activities members and candidates are involved in, the specific knowledge, skills, and abilities required will vary based on their roles.

Guidance

Competence in a role means possessing sufficient knowledge, skills, and abilities to perform that specific role successfully. However, the specific conduct that determines competence varies depending on the nature of the professional duties and the circumstances applicable to each member or candidate. It is important to note that a lack of competence cannot always be inferred from an unsuccessful or negative outcome, as failures can occur even in the careers of competent professionals.

Key Components of Competence:

1. Knowledge: The information applied directly to the performance of a function and its effective application.
2. Skills: Capabilities to perform role-specific tasks and achieve professional goals.
3. Abilities: Attitudes and capabilities that support behaviors leading to observable outcomes.

Competence goes beyond educational qualifications. For instance, a highly educated professional in one domain may not possess the necessary experience or skills to perform competently in another, unfamiliar area.

Recommended Procedure

To achieve and maintain competence, members and candidates should consider engaging in the following activities:

– Regular participation in professional development or continuing education programs.

– Pursuing additional professional certifications or designations.

– Attending industry conferences, seminars, or webinars.

– Engaging in training programs offered by their employers.

– Committing to informal continuing education or self-study through reading industry-related articles, treatises, and publications.

– Participating in expert groups or industry organizations.

– Acquiring new skills or knowledge as necessary when professional responsibilities change or expand.

Application of the standard.

Example 1: Maintaining Competence

Emma Rodriguez, a senior economic analyst for a global investment firm, regularly updates her knowledge about economic policy changes and global market trends. She subscribes to leading economic journals, attends international financial conferences, and consults with economic experts to keep her analysis relevant and accurate.

Comment: Through continuous learning and active engagement in her field, Rodriguez meets the requirements of Standard I(E) for maintaining competence. Her efforts ensure that her analyses are up-to-date and valuable, providing high-quality service to her clients.

Example 2: Improving Competence

Vijay Kumar is a portfolio manager at an asset management company. To better serve his clients, he decides to incorporate alternative investments such as private equity and hedge funds into his portfolio strategies. Kumar enrolls in specialized courses on alternative investments and earns a certification in this area.

Comment: Kumar satisfies Standard I(E) by proactively improving his knowledge and skills in alternative investments. His efforts to enhance his competence allow him to offer more diverse and potentially profitable investment options to his clients.

Example 3: Change in Role

Sarah Lam, formerly an equities analyst, is promoted to the role of chief investment officer (CIO) at her firm. Understanding that her new role requires a deeper grasp of asset allocation and risk management, she undertakes an intensive training program and collaborates with experts in these areas to build her competence.

Comment: By recognizing the need for new knowledge and actively seeking to acquire it, Lam adheres to Standard I(E). Her actions demonstrate a commitment to fulfilling the responsibilities of her new role effectively.

Example 4: Supervisory Responsibility

Robert Chen, head of research at a financial advisory firm, finds himself responsible for mentoring a team of junior analysts. Knowing that effective supervision and team management are critical, Chen completes a leadership course and attends workshops focused on mentoring and compliance regulations.

Comment: Chen extends his competence to cover his new supervisory responsibilities, thereby meeting Standard I(E). His efforts ensure that he can guide his team effectively while maintaining compliance and high research standards.

Example 5: Choosing Investments

Anika Patel, a financial advisor, carefully selects a variety of mutual funds for her clients based on in-depth research and thorough due diligence. However, due to unforeseen market conditions and not because of any negligence on her part, several of the funds underperform.

Comment: Given that Patel’s investment decisions were based on comprehensive research and a sound understanding of her clients’ needs, the resulting underperformance does not imply incompetence. She meets Standard I(E) by following a diligent and well-informed investment process.

Example 6: Understanding New Investment Products

Daniel Morgan, an investment consultant, starts receiving requests from clients interested in investing in the nascent non-fungible tokens (NFTs) market. Realizing his limited understanding of NFTs, Morgan takes an online course, participates in webinars, and consults industry experts to become well-versed in this emerging asset class.

Comment: Morgan adheres to Standard I(E) by not rushing into investments without a solid understanding. His commitment to acquiring the necessary knowledge and skills ensures he can competently advise his clients on NFTs, aligning with the standard’s principle of competence.

Questions

John Smith has been an equity analyst for a mid-sized investment firm for ten years. Recently, he was promoted to the position of Chief Investment Officer (CIO), a role that requires a broader understanding of asset allocation, risk management, and investment strategy across various asset classes. Although John has extensive experience in equity analysis, he has limited knowledge in fixed income, derivatives, and alternative investments. To comply with Standard I(E), John decides to: What actions should John take to maintain competence in his new role as CIO?

1. Rely solely on his existing knowledge of equity analysis and delegate other responsibilities to his team members.
2. Enroll in advanced courses on asset allocation, risk management, and fixed income, and regularly attend industry conferences to broaden his knowledge.
3. Focus exclusively on hiring new team members with expertise in areas where he lacks knowledge.

Solution:

The correct answer is B.

Enrolling in advanced courses and attending industry conferences will help John acquire the necessary knowledge and skills for his new role, ensuring he maintains competence as required by Standard I(E).

A  is incorrect. Relying solely on his existing knowledge and delegating other responsibilities does not ensure that John is competent in his new role.

C is incorrect. While hiring experts is beneficial, it does not replace the need for John to personally acquire the necessary knowledge and skills.

Question 2

Sarah Lee, a financial advisor, has been advising her clients on traditional investment products such as stocks, bonds, and mutual funds. Recently, several clients have shown interest in sustainable and socially responsible investing (SRI). Sarah realizes that she lacks sufficient knowledge in this area to provide competent advice. To comply with Standard I(E), Sarah plans to. Which approach should Sarah take to ensure she is providing competent advice on SRI to her clients?

1. Immediately start recommending SRI products to her clients based on basic information available online.
2. Avoid discussing SRI with her clients and continue focusing on traditional investment products.
3. Attend specialized seminars on SRI, obtain relevant certifications, and collaborate with experts in the field.

Solution

The correct answer is C.

Attending seminars, obtaining certifications, and collaborating with experts will help Sarah acquire the necessary knowledge and skills to competently advise her clients on SRI, in line with Standard I(E).

A is incorrect. Recommending products based on basic information does not ensure a competent understanding of SRI.

A is incorrect. Avoiding SRI altogether neglects the evolving interests of her clients and does not reflect a commitment to maintaining competence.

 

Question 3

David Brown is a senior analyst at a financial research firm. His firm recently decided to expand its services to include comprehensive economic analysis reports. David, whose expertise lies primarily in company-specific financial analysis, now needs to incorporate macroeconomic data and trends into his reports. To comply with Standard I(E), David should. What steps should David take to ensure he meets the competence requirements of his expanded responsibilities?

1. Continue relying on his company-specific analysis skills and avoid integrating macroeconomic data.
2. Enroll in economics courses, attend relevant workshops, and subscribe to leading economic journals to enhance his understanding of macroeconomic trends.
3. Delegate the task of economic analysis to a colleague with an economics background and focus on his area of expertise.

Solution:

The correct answer is B.

By enrolling in courses, attending workshops, and reading economic journals, David can develop the necessary skills and knowledge to competently integrate macroeconomic data into his reports, as required by Standard I(E).

A is incorrect. Ignoring the need to incorporate macroeconomic data does not meet the competence requirements for his expanded role.

C is incorrect.  While delegation can be helpful, David must also personally acquire the knowledge to fulfill his expanded responsibilities competently.

Reading 46: Guidance for The Standards of Professional Conduct (I-VII)
LOS 46 (a) Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations.