Here is the vignette:
Frank Litman, CFA, was recently hired as a portfolio manager by Twain Investments, a fairly small asset management firm. Since attending graduate school 10 years ago, Litman has managed a limited number of accounts belonging to friends. All of these accounts are currently too small to meet Twain’s minimum balance requirement of $5 million and generate only modest fees for Litman. Litman disclosed the arrangement to the human resource (HR) manager when he interviewed for his position with Twain. The HR manager agreed that the accounts were too small and would probably never be large enough to meet Twain’s minimum size requirement.
After accepting the position with Twain, Litman met with each of the friends for whom he manages portfolios. He recommended they find another financial adviser. Litman’s friends argued that a different adviser would undoubtedly charge higher fees and asked Litman to continue managing their money as a personal favor. Following the meetings, Litman sent separate letters to both the Twain HR manager and his friends explaining his employment relationship and that he also manages some small portfolios for a few of his friends.
The following month, Litman updated the promotional material that he shares with all of his Twain clients and prospects. The material summarizes the portfolio trading strategy Litman developed by analyzing 20 years of historical data. In his analysis, Litman determined that his strategy of investing in large-capitalization US stocks would have outperformed the S&P 500 Index over the last 20 years with an average annual return of 8.91% versus 8.22% for the S&P 500. The concluding paragraph of the brochure states, “We believe long-term use of this trading strategy will lead to superior performance compared with the S&P 500.” The brochure includes a footnote in small print stating, “Results are gross before taxes and thus may be higher than actual results would have been over the given period. Past performance cannot guarantee future results.”
Q: In the footnote of the promotional material about the performance of his portfolio trading strategy, Litman is least likely in compliance with the CFA Institute Standards of Professional Conduct with respect to:
- fees.
- taxes.
- results.
Can someone explain why the answer is C?
