Subject 16. Standard V (B) Communication with Clients and Prospective Clients

V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

B. Communication with Clients and Prospective Clients.

Members and Candidates must:

  • Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
  • Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
  • Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

All important factors relating to the investment recommendation must be included in the report. Members must include known limitations in the analysis and conclusions in the report and consider all risks associated with the investment.

Members should consider including the following information in research reports:

  • Expected annual rate of return, taking into account cash flows and expected price changes during the holding period.
  • Annual amount of income expected (current and future).
  • Current rate of income return or yield to maturity.
  • Degree of uncertainty associated with cash flows.
  • Degree of marketability / liquidity.
  • Business, financial, political, sovereign, and market risks.

A report can be given in many forms: a written report, in-person communication, telephone conversation, media broadcast, or transmission by computer (e.g., on the Internet or by email).

Opinions should be distinguished clearly from facts. Specifically:

  • Past should be separated from future. Past represents facts, while forecast on future represents opinions.
  • In the case of quantitative analysis, facts should be separated from statistical conjecture.

Procedures for compliance

  • The selection of relevant factors is an analytical skill, and determination of whether a member is in compliance depends heavily on case-by-case review. To assist the after-the-fact review of a report, the member must maintain records indicating the nature of the research and should, if asked, be able to supply additional information to the client (or any user of the report) about factors not included.
  • Members must take reasonable steps to assure themselves of the reliability, accuracy, and appropriateness of the data included in each report. If the data has been processed in any way (e.g., into financial ratios), a member should ascertain that such processing has been done in a manner consistent with the member's analytical purposes.
  • Acknowledgment of the source(s) should be made when appropriate.

Example 1

To simplify his report, an analyst leaves out details of the valuation models. He violates this standard because clients need to fully understand the analyst's process and logic in order to implement the recommendation.

Example 2

An analyst issues a "buy" recommendation on a stock, mainly based on his optimistic assessment of the company's operation. He violates this standard by failing to distinguish between opinions and facts; his optimistic assessment of the company is his own opinion.

Example 3

An analyst issues a report promoting a firm's new investment strategy. The report stresses the likelihood of high returns. However, it does not describe the strategy in detail. The analyst violates this standard because his report fails to describe properly the basic characteristics of the investment strategy.

Example 4

An analyst has a duty to gather information about a company in order to make fully informed recommendations about it. As a result, the analyst is required to ask the management of the company to review his research report for inaccuracies. The analyst still has a duty to examine and verify the information presented to him by the company he is examining.

User Contributed Comments 4

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asianl6: need to inform client the basis of the recommendation.
Galt2012: Don't quite agree with example #2: doesn't word "assessment" at least leave open the possiblity that the analyst did some objective diligence? If I plow through statiscal charts, company and industry info, economic analysis and calculate probabilities won't I end up with an "assessment"?
Dohei: Galt I think the focus should be more on the word optimistic. If he had done a proper scenario or sensitivity analysis then his assessment may be sound. Its just the basis for his assessment that lacks the proper grounding in this case.
NikolaZ: I agree with Dohei, a proper assessment should be thorough and not optimistic. Once you are conducting an assessment with an optimistic approach, you are doing so in bias. However from Galt's view, it could also be inferred that the optimism was gained as a result from a thorough assessment. I agree there is ambiguity but that is what makes these questions so difficult.