- CFA Exams
- CFA Level I Exam
- Study Session 1. Ethical and Professional Standards
- Reading 3. Guidance for Standards I-VII
- Subject 7. Standard III (A) Loyalty, Prudence, and Care
CFA Practice Question
There are 361 practice questions for this study session.
CFA Practice Question
Brokerage firm A offers the lowest cost for trade execution. Brokerage firm B has higher costs but also provides research that your firm can use to make investment decisions beneficial to clients.
A. Your firm is obliged to trade with firm A.
B. Your firm can use firm B only if the research would be purchased anyway and the cost of firm B's services are lower than the combined cost.
C. Your firm can use either firm because they are providing a different combination of services.
User Contributed Comments 16
|coops||Answer B states that the combined cost of trading fees and research is lowest with answer B. The "quality" of the research is irrelevant as far as fair dealing is concerned. It's a soft-dollar arrangement.|
|werkzeugmann||Be careful how you define quality, Just because you buy a high priced wine does not make it a better quality--does it?|
|mtcfa||The word "only" in choice B, to me, was cause to disregard it as the correct answer.|
|gord||It screams of "soft dollar" but you can't tell if this research is used for this recommendation or for other clients...|
|hizmo||General principles of soft dollar standards require best execution while minimizing costs. Therefore lower cost is secondary. Hence wrong on both counts if you should A or B purely based on costs. therefore answer is C.|
|wollogo||The only way you would choose firm A is if the execution cost + cost of obtaining research from somewhere else was less than the execution cost of B. Trading with B is not necessarily a soft dollar arragement, you are paying more for research that is beneficial to your clients. Research is not free!|
|vasula||The word ONLY make it a wrong answer. Besides there is no indication of who or from where this research may be 1. No other Brokerage is assume. A does NOT provide B does . 2. SO where to "purchsed" 2. Anyway HOW does one quantify "Value" research to Dollars ? I for one have no idea ..is research from Bear & Sterns have more "value" than Merril Lynch? is there a financial model out there to calculate this?|
|dbadidas8||I guess the point is although the CFA Body of Knowledge underlines that the broker with the cheapest execution cost should be taken, there is still room for subjectivity based on the potential benefits.|
|bmeisner||I got this wrong and answered C. After thinking about it I agree with B the answer provided. If the price of the research is quantifiable (i.e. a purchaseable substitute exists) then since it is the advisor's job to minimize total costs he should only trade with firm B.|
|TammTamm||I thought the answer was C simply because the two firms appear to offer different services. Firm A doesn't offer research services.|
|Lamkerst123||Apply a general rule of fiduciary duty -- do the best deal for you client.|
|dblueroom||I think an important point is that the research will benefit clients, whose brokerage is used to purchase the research. I don't have a problem with the word "only" because otherwise without the research, the firm should seek the best execution which means lowest cost of execution.|
|tim2||I went C. I think for myself or clients I'd go for the broker that provided the best value rather than the lowest absolute cost. I'm not convinced the cfa standards bar that|
|gill15||I was with C as well. If switching to the other is at at the detriment of one of your clients, I thought you could not switch. This might not be detrimental in the risk reward of his investement but is detrimental in his overall cost structure|
|youngfun||So it makes me think that you should only focus on what needs to be done at a particular moment (considering costs and efficiency), in that case it makes sense - B.|
|JNW1980||Some of these questions are really clever. Some try to be clever but just end up "overfitting" to a degree that is ridiculous.|