Jack Stevens is employed by a company to provide investment advice to participants in the firm’s 401(k) plan. One of the investment options is a stable value fund run by the company. Stevens’ research indicates that the fund is far riskier and less liquid than the typical stable value fund and has a fundamental asset value lower than book value of the assets. He tells Jessica Cox, the head of employee benefits, about his research, and indicates that he will advise new employees to not invest in the fund and will advise employees who already own the fund to reduce their holdings in the fund. Cox points out that the fund is not in any current danger because there are very few redemptions requested of the fund. Cox also states that a sell recommendation may become a self fulfilling prophecy, causing investors to redeem their shares and forcing the fund to liquidate, which in turn will cause the remaining investors to receive less than their promised value. Stevens agrees with this assessment and feels his fiduciary duty is to all employees. Stevens should: A) continue to recommend that new investors do not invest in the fund and existing investors reduce their holdings. B) continue to recommend that new investors do not invest in the fund, but not advise existing investors to reduce their holdings. C) recommend that new investors invest in the fund and existing investors maintain their holdings. D) tell investors he cannot give advice on the fund because of a conflict of interest.
The correct answer is A. Jack should recommend that new investors not invest in the fund and existing investors reduce their holdings. Jack’s research indicates that the fund exposes investors to undue risk and its book value is overpriced relative to its intrinsic value. Jack’s first duty is to his clients, and whether or not it will create a self-fulfilling prophecy, the fund is overvalued, and should be designated ‘sell.’
A, easy. this is all about doing the right amount of due diligence.
Its all about his Fidicuary Duty to the investors in the 401K. The 401k is far riskier and less liquid and the investors think so he must tell them to pull out/ not invest in that fund.