Business Practices - Communications with Clients and Prospects

Fiduciary Duty
A fiduciary is a person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person, rather than for his or her own profits.

All securities professionals must handle client funds and offer  advice in a professional, ethical and responsible manor. Because of such, they have a higher standard of ethical responsibility than the average person.

if the professorial has a fiduciary duty to the client as in the case of an investment adviser the adviser, must put the interest of their clients above their own.
 

Look Out!
It is vitally important to know that in NO case can an agent ask a client to sign an "affidavit of liability" waiver; meaning that the agent is not responsible for any losses that may occur in the account - better known as an Exculpatory Clause.

Disclosure
Investment advisers MUST disclose the nature of the relationship between the client and the investment adviser. Investment advisers CANNOT participate in, or be compensated (unless there is a specific exemption) by any percentage of gains of a client's portfolio, and the basis of all compensation must be disclosed in the investment advisory contract.
 

Look Out!
There are a few instances in which an investment adviser can benefit from portfolio gains. Advisers can participate in capital gains (receive a performance-based fee), if the client is:
an institutional investor, such as a mutual fund, a private client with a minimum net worth of $2 million or private client with a minimum of $1,00,000 invested with the adviser.

Furthermore, if any change within an Investment Adviser's partnership firm is made (e.g. a change in partners or ownership); clients must be made aware of the change in a reasonable time. It is important to note that this act of notification only applies to partnerships, and not corporations. Also, if the change in partnership could result in new ownership of the business, the IA must have client approval.

In addition, advisers are required to supply clients with account activity statements on a quarterly basis. Lastly, it is illegal for an adviser to have custody of a client's funds or securities, if the Administrator prohibits or restricts such.
 

Exam Tips and Tricks
Custody is defined as having physical possession of funds or securities, though an Administrator may require that an Adviser post a bond when maintaining custody. However, funds and securities can be placed in custodial accounts with broker-dealers instead.

Unlawful Representations


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