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C. Suitability.
#analyst-notes #code-of-ethics-and-standards-of-professional-conduct #iii-duties-to-clients
Example 1

After a five-minute interview, you advise a client how to invest a substantial proportion of her wealth. You have violated the "Know your customer" rule. You do not have adequate basis to make a detailed recommendation.

Example 2

An analyst tells a client about the upside potential, without discussing the downside risks. He violates the standard because he should discuss the downside risks as well.

Example 3

When recommending an investment to a client, an analyst mainly focuses on the characteristics of the specific investment. He violates the standard because the primary focus for determining the suitability of an investment should be on the characteristics of the entire portfolio.

Example 4

Should a firm move from a fundamental approach to selecting stocks to a more technically-based model, it would need to communicate this change to all of its current and prospective clients. Clients must always be made aware of the risk of investing as well as possible downside risks. The portfolio must always be looked at as a whole.

Example 5

The portfolio managers at DD Investing sit down with Danielle to analyze her needs and circumstances. While discussing her position with her, they find out that a wealthy cousin left her $500,000 as part of her inheritance. This triples the size of her current portfolio. As a result of the increased funds, Danielle's willingness to assume risk has increased; she can now bear more risk. Therefore, the portfolio managers should now invest more funds in the equity side of her portfolio, to increase risk and potential returns.

Example 6

A client requests to change his investment strategy from investing in North-American blue chips to emphasizing countries with high economic growth rates. The portfolio manager should explain the potential risks and returns to the client, and ask him to consider them before changing the investment strategy.

Example 7

An investment manager uses the proceeds of some high yielding securities to invest 20% of the client's portfolio in a high-risk stock, because he believes that a merger is in place and will push the price of the stock up. He will then sell the stock and repurchase other high-yielding securities. The client depends on the portfolio for her support. The manager has violated this standard, since he has not considered the effects of each transaction within the context of the entire portfolio.
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