Members and Candidates have a duty of loyalty to their clients and must
act with reasonable care and exercise prudent judgment. Members and
Candidates must act for the benefit of their clients and place their clients’
interests before their employer’s or their own interests.
Investment actions must be conducted in the sole interest of clients, and in a way the manager believes is based on the client’s best interest. When in control of a client’s money, members are held to a fiduciary standard.
The client of an investment manager is not always the person who hires them. When managing pension plans or family trusts, the client is the ultimate beneficiary of the funds. In the case of funds managed to specific mandates (for example, index funds) the duty is to act in a manner consistent with the mandate. Investment decisions must be evaluated in the context of the overall portfolio, rather than the merits of any given investment decision.
Commission dollars are paid by the client and must be spent wisely. Managers should seek best execution. They may use “soft-dollar” or directed brokerage arrangements only to purchase goods or services that directly benefit the client. Likewise, proxy voting policies should be established that further clients’ interests.
To comply with the duty of loyalty, prudence, and care, managers should:
- provide detailed account updates at least quarterly
- disclose where clients’ assets are being held and if they are moved
- separate each client’s assets from those of any other entity
- seek client approval on questionable matters
- establish the investment objectives for the client
- consider all investments in the context of both the client’s needs and the overall portfolio
- update client information regularly
- deal fairly with all clients
- disclose conflicts of interest
- disclose compensation arrangements
- vote proxies
- maintain confidentiality
- seek best execution
- place client interests first
The CFA Institute Standards of Practice Handbook provides a number of examples of situations that may violate the duty of loyalty, prudence, and care.
- Using pension fund assets to support the plan sponsor’s company stock, when the manager believes it is overvalued
- Directing brokerage to a broker that does not provide best execution in exchange for goods and services that do not benefit the client (such as firm overhead expenses or client referrals)
- excessive trading to generate commission income
- Treating the accounts of fee-paying family members less favorably than those of other fee-paying accounts