Ethics and Fiduciary Responsibility
Ethics and Fiduciary Responsibility
This domain tests the conduct expected of a financial professional: loyalty, care, confidentiality, disclosure, suitability, and management of conflicts. Expect scenario questions on commissions, referrals, custody of client funds, guarantees, and documentation.
Core rules
- A fiduciary must act in the client’s best interest and place the client’s interest above the adviser’s compensation.
- Disclose all material conflicts, including commissions, referral fees, and proprietary products.
- Obtain informed consent and make recommendations suitable to the client’s objectives and constraints.
- Protect confidentiality subject to legal requirements, including anti-money-laundering and data-privacy rules.
- Never guarantee investment returns, borrow client funds, or commingle assets.
- Document the advice, alternatives considered, and client instructions.
Worked example
An adviser can recommend Product A, which pays a 3% commission, or Product B, which pays 1% and has lower costs but similar risk. The client’s goal is long-term growth with low cost. The adviser discloses the compensation difference, recommends B, and documents why B is suitable. Reasoning: the recommendation serves the client, and the conflict is disclosed rather than hidden.
Traps
- Recommending solely for commission or sales volume.
- Promising guaranteed returns.
- Borrowing from or lending to clients.
- Using client information without consent.
- Failing to document advice and conflicts.