Another Ethics Question

I swear sometimes, I think I know something until I get hit in the head with a question like this: "Gerri Kocimski, CFA, manages the portfolio of Alfred Tomba. Kocimski sends Tomba a letter requesting an update of Tomba’s financial situation. Tomba declines to answer the update questions but sends a check for $1 million, requesting that it be invested in growth stocks. If growth stocks are not suitable for Tomba according to the information Kocimski has on file, Kocimski should most appropriately:

A) execute the request because it is an unsolicited trade. B) purchase the growth stocks if Tomba states that suitability is not a concern for this purchase. C) not take any action in Tomba’s account unless he receives the updated financial situation. "

I thought the answer was C, but it was B. So if the client is all like yo dude, here’s a mill… put it penny stocks… don’t worry about that whole suitability thing… the advisor should do what he says? That makes no sense to me whatsoever. And yet, when initially sitting down with the client if the advisor finds the client has a high willingness to accept risk, but a low ability to accept risk, he just should ignore the investors willingness and create a lower risk portfolio.

I’m confused by the distinction.

You shouldn’t ignore it. Indeed, when you reach Level III you’see that you should include under unique circumstances (in the constraints section of the IPS) that the client needs councelling/education to rectify the disagreement. You want neither timid nor reckless clients.

Yes, but then this question: Based on a questionnaire about investment risk, an advisor concludes that an investor’s risk tolerance is high, but based on an analysis of the client’s income needs and time horizon, he concludes the investor’s risk tolerance is low. The most appropriate action for the advisor is to:

A. emphasize stocks over bonds. B. emphasize bonds over stock. C. educate the client about investment risk and re-adminster the questionnaire.

I selected C for this question for the very reason you suggested above. C is incorrect, and the answer is B. It sure as heck sounds like the advisor is ignoring the high risk tolerance. The explanation was as such: if the investor has a low willingness but high ability he should educate the client about about the risks and re-adminster the questionnaire. In this case, the investor has high willingness and low ability to take on risk, therefore the advisor should emphasize bonds over stocks.

I just don’t get how this question’s answer and the question in the OP can both have the answers that they do.

The difference that I see in the second one is that it doesn’t say that the client’s willingness to take risk and his ability to take risk are at odds; is says that his risk tolerance (a combination of the two) according to the questionnaire is at odds with his risk tolerance according to his needs and time horizon. That suggests a flaw in the questionnaire.

If I sent my financial advisor a request to buy a trade for me and he questioned me about it that’d be fine. If he didn’t actually put it through he would be fired and I’d probably threaten legal action. (wouldn’t go through with it, but I’d make a mess of things).

Advisors work for their clients.