Could someone explain why this statement is not correct and represent a violation of the Standard III C?
An investment that would otherwise be deemed unsuitable for the client may be purchased if it is allowed by the client´s mandate.
So, if a client request to buy a particular share for example and I think it is not suitable following his mandate should I have to reject the request? Or should I do it but requesting him to change its IPS?
I thought before this question that I should persuade him that is not suitable for him but if he insists, buy it and request an update in the mandate (but not conditional to execute the request)
The way I understand it, is that if the request he is making will materially alter his portfolio then you should advise him to to change his IPS before taking the request, however if it does not then advise him on how it differs from his IPS and if he still agrees then make the investment. Hope this helps!
Not everything what might be allowed (or not explicitly excluded) is automatically suitable. Furthermore, the question does not specify a concrete client request. Client requests seem to not apply here. Cheers, Oscar
I read a similar problem before. I believe you are not allowed to buy it before the IPS is changed. I think you are supposed to dissociate from the client.
"In cases of unsolicited trade requests that a member or candidate knows are unsuitable for a client, the member or candidate should refrain from making the trade until he or she discusses the concerns with the client. The discussions and resulting actions may encompass a variety of scenarios depending on how the requested unsuitable investment relates to the client’s full portfolio.
Many times, an unsolicited request may be expected to have only a minimum impact on the entire portfolio because the size of the requested trade is small or the trade would result in a limited change to the portfolio’s risk profile. In discussing the trade, the member or candidate should focus on educating the investor on how the request deviates from the current policy statement. Following the discussion, the member or candidate may follow his or her firm’s policies regarding the necessary client approval for executing unsuitable trades. At a minimum, the client should acknowledge the discussion and accept the conditions that make the recommendation unsuitable.
Should the unsolicited request be expected to have a material impact on the portfolio, the member or candidate should use this opportunity to update the investment policy statement. Doing so would allow the client to fully understand the potential effect of the requested trade on his or her current goals or risk levels.
Members and candidates may have some clients who decline to modify their policy statements while insisting an unsolicited trade be made. In such instances, members or candidates will need to evaluate the effectiveness of their services to the client. The options available to the members or candidates will depend on the services provided by their employer. Some firms may allow for the trade to be executed in a new unmanaged account. If alternative options are not available, members and candidates ultimately will need to determine whether they should continue the advisory arrangement with the client"
(Institute 55)
Institute, CFA. 2015 CFA Level I Volume 1 Ethical and Professional Standards and Quantitative Methods. Wiley Global Finance, 2014-07-14. VitalBook file.
So, basically I understand if the request is small, you should advice him and execute his final decision, if the request has a big impact in the portfolio you should update IPS, or dissociate.
But what if we see the problem in the other way, if the advisor contact the client asking for autorization to buy a good oportunity and the client accept it (following a reasonable basis, diligence…)