CFA Practice Question
Xuanchi Zuan is a successful portfolio manager with Up & Away, a money management fund that
operates strongly bullish funds. One of Zuan's clients, Margo Margolis, is about to retire in a couple of years. Margo has been phasing out her risky investments over the past five years, moving them into long-term treasury bonds. However, she recently read in a financial magazine the attractiveness of investing in emerging markets. She was especially enticed by the 30% and 40% annual returns observed in these markets over the past 2+ years. She approaches Zuan and instructs him to move 30% of her funds into these markets. Zuan should:
A. refuse to do so, pointing out the high risks involved in such investments.
B. evaluate the emerging market investments and move the funds only if he considers them suitable for Margo.
C. none of these answers.
Explanation: Zuan cannot refuse to do something that his client instructs him to do, as long as it is legal. However, it is his duty to apprise his clients of the risks and returns associated with different instruments and advise them about the suitability of including such investments in their portfolios. Once the client is aware of all the pitfalls and rewards, the final decision must rest with the client. In Margo's case, Zuan should do the same before acting on her instructions.
This question relates most directly to Standard III (A) - Loyalty, Prudence, and Care.
User Contributed Comments 5
| User | Comment |
|---|---|
| isida | fiduciary duty: you must inform your client about the risks involed with all investments before they go ahead with it. |
| wollogo | I thought that was the difference between discresionary and non-discresionary, if the portfolio is discresionary then surely the portfolio manager has control over what assets to invest in. |
| steved333 | True, but in this case, the client sees an investment that she wants. If Zuan has discretion, he may bypass this investment in the interest of protecting her portfolio; however, since she asked for it, it is only prudent that he warn her of the inherent risks before he just willy-nilly makes a decision. Remember, if you have discretion, you don't have to get approval for everything you do, but you have to make sure your client understands what they ask you to do before you do it. If you have discretion, the client probably is not very savvy and will need the guidance. |
| thekapila | I think B could be the right choice. As explained in question " however, she recently read in a financial magazine the attractiveness of investing in emerging markets. She was especially enticed by the 30% and 40% annual returns observed in these markets over the past 2+ years ". So since client has just read there is no reasonable basis for investment decision.So portfolio manager should evaluate and then see if its suitable.Moreover he is about to retire so need to check before investing as a sanity check. |
| iambroke | thekapila...The choice B sez he must move them only if he considers it suitable....does that mean he will not move it if it is unsuitable?? the answer is he must infor the client and if the client still persists he must get acknowledgement that suitability is not a consideration in this case |