Fiduciary

An adviser's fiduciary duty includes:

1. A.Maximizing the adviser's revenueAn adviser is entitled to run a profitable business, which is what makes this sound reasonable. But the fiduciary duty describes whose interest governs when the two diverge, and the answer is the client's, which is why conflicts must be disclosed rather than exploited.
2. B.Hiding feesConcealing compensation is a breach of the duty, not a component of it. Fees are material to any client evaluating the relationship, so they belong in the open.
3. C.Seeking best execution and disclosing conflictsCorrect - core fiduciary obligations.
4. D.Guaranteeing returnsGuaranteeing performance is prohibited regardless of the adviser's intentions, so it cannot be an element of any duty. Fiduciary obligation concerns the care and loyalty brought to the advice, not the results the market delivers.

Why: The fiduciary duty includes seeking best execution and disclosing material conflicts of interest.

The prudent investor rule requires a fiduciary to:

1. A.Manage with care, skill, and diversification at the portfolio levelCorrect - modern prudent investor standard.
2. B.Guarantee returnsNo fiduciary may guarantee investment results, and promising them would itself be a violation. The standard governs the quality of the decision-making process, not the outcome it produces.
3. C.Judge each holding in isolationThis is the older prudent man rule, which examined each investment on its own and effectively barred anything speculative. The modern prudent investor standard replaced it precisely so a risky holding can be judged by its contribution to the total portfolio.
4. D.Avoid all volatile assetsAvoiding all volatility would itself breach the duty, since a portfolio with no growth assets exposes the beneficiary to inflation risk. Volatile assets are permitted when they fit the portfolio's objectives and risk level.

Why: The prudent investor standard requires care, skill, and diversification, judged at the portfolio level.

A client tells his adviser that he expects to inherit a substantial sum from an elderly relative. In building the current profile, the adviser should treat that expectation as

1. A.a current asset, valued at the amount the client says he expects eventually to receive.Wrong. Nothing has been received, and the relative may spend it or revise the estate plan at any time.
2. B.a factor to note and monitor, but not an asset to be counted until it is actually received.Correct. It preserves the planning relevance without treating money controlled by someone else as a resource.
3. C.grounds for raising the equity allocation now, since the inheritance will cushion any loss.Wrong. That borrows against an outcome the client has no power to bring about.
4. D.irrelevant to the profile, because only assets held in the managed account may be considered.Wrong. A fiduciary considers the full circumstances of the client, not merely the balance under management.

Why: A profile records the resources the client actually controls, and an expected inheritance is controlled by someone else who may spend the money, incur medical costs or change the estate plan. The expectation is worth noting and revisiting, because it may bear on long-range planning and on how the client thinks about his own goals, but it cannot be entered as an asset or used to justify taking risk today. Nor can it be ignored entirely, since a fiduciary looks at the whole situation of the client rather than only the managed account. It becomes an asset when it is received and not before.

An adviser is asked to serve as a fiduciary to the 401(k) plan of Kestrel Manufacturing, a privately held company with 300 employees. ERISA primarily governs:

1. A.Private-sector employer retirement plansCorrect - ERISA covers private plans.
2. B.Government employee plansGovernment and public-school plans are expressly exempt from ERISA's coverage and are governed instead by state law and their own federal provisions. ERISA was enacted to protect workers in the private sector.
3. C.Municipal bondsMunicipal securities are regulated under the securities laws by the MSRB and SEC. ERISA is employee benefits legislation and does not regulate any class of security.
4. D.Only IRAsIRAs borrow some ERISA concepts and enjoy certain protections, which makes this partly plausible. IRAs are individual accounts created under the tax code, while ERISA's core subject is the employer-sponsored plan.

Why: ERISA sets standards for private-sector employer-sponsored retirement plans.