MCQ Quiz

Question 1 of 14

A trust officer receives an internal bonus when his referrals to the bank's financial planning unit lead to a sale. He tells his supervisor, but he refers clients without mentioning the internal arrangement because no outside party is involved. He has most likely:

violated the standard because internal referral payments must also be disclosed to clients
complied because only third-party referral fees require client disclosure
complied because supervisor disclosure is enough for an internal arrangement

Question 2 of 14

A consultant hired by a state pension plan recommends an emerging-markets manager. The manager separately pays the consultant if selected, but the recommendation appears objective and the plan is satisfied. The consultant's conduct is most likely:

acceptable because the recommendation was appropriate
acceptable if the pension plan later confirms the choice independently
in violation because the separate payment should have been disclosed

Question 3 of 14

A manager recommends an outside firm to a prospect and will receive continuing research support as long as referred accounts stay with that firm. He discloses only that there is 'a relationship' between the firms because he believes noncash support is different from a fee. His conduct is most likely:

acceptable because research support is not cash compensation
acceptable if the support improves service quality for all clients
in violation because noncash and continuing benefits are still referral consideration

Question 4 of 14

A portfolio manager steers a large share of her firm's trading to a classmate's broker/dealer, even though pricing is not competitive and the research is weak. In return, the broker/dealer recommends the manager's advisory services to wealthy households. If she tells the referred households but not her employer, her conduct is most likely:

acceptable because the clients most affected received disclosure
acceptable if the manager genuinely believes the referrals are deserved
in violation because the employer also must be informed of the referral arrangement

Question 5 of 14

An adviser and a lawyer agree to send clients to each other. No cash changes hands, and the adviser informs his employer but says nothing to the clients he sends to the lawyer. The adviser's conduct is most accurate as:

acceptable because there is no cash payment
unacceptable because mutual benefit still requires disclosure to clients and prospective clients
acceptable because employer disclosure alone addresses the conflict

Question 6 of 14

An investment manager learns that a prospect arrived through a compensated referral arrangement with a broker. To avoid making the referral look biased, the manager waits until the prospect signs the account documents and then discloses the arrangement. This approach is most likely:

acceptable because disclosure was eventually made
unacceptable because disclosure should occur before any formal agreement for services
acceptable if the prospect can still terminate the relationship afterward

Question 7 of 14

A broker refers prospective tax-exempt accounts to an investment manager. In return, the manager provides research, market reviews, and directs commission business back to the broker. When a prospect contacts the manager, the manager says only that the broker 'thinks highly' of the firm. The manager should most likely have:

said nothing more because the prospect asked about investment skill, not compensation
disclosed the referral arrangement, including the noncash and commission benefits
disclosed only if the prospect first became a client

Question 8 of 14

A current client casually tells a friend that her brother is a good financial adviser. The brother has a standing policy of paying referral fees to current clients, but the sister does not know that and refuses the fee once offered. Which statement is most accurate?

The adviser violated the standard because any standing referral program must be disclosed even if no fee is actually paid
Neither party violated the referral-fee standard because the sister was unaware and no referral fee was paid
The sister violated the standard because family ties always require disclosure in personal conversations

Question 9 of 14

A manager discloses that a referring broker receives 'support from our firm' if a prospect becomes a client. She does not explain whether the support is a flat fee, research, commissions, or another benefit and gives no estimate of value. Her disclosure is most likely:

sufficient because it alerts the prospect that some arrangement exists
sufficient if the prospect can ask follow-up questions
insufficient because the nature of the benefit and estimated value should be disclosed

Question 10 of 14

A prospective client asks why an adviser is recommending a particular subadviser. The adviser discloses that outside subadvisers are used but does not mention that the main adviser receives a discount linked to placing client assets with one of them. The adviser has most likely:

complied because clients only need to know that a subadviser is involved
violated the standard because the financial incentive affecting the recommendation was not disclosed
complied because the discount reduces the adviser's own costs rather than increasing the client's fee directly

Question 11 of 14

A broker recommends an investment manager to a prospect. The manager knows the broker will receive commissions from trades generated by the referred account, but the manager assumes the broker is responsible for any disclosure because the broker made the recommendation. The manager's assumption is most likely:

reasonable because the recommending broker controls the client contact
unreasonable because the manager also has a duty to disclose the referral arrangement to the prospect
reasonable if the manager does not know the exact amount of the commissions

Question 12 of 14

An adviser tells a prospect that a referring client may receive a fee if the prospect signs up, but she adds that the fee is paid only after the prospect becomes a client, so the prospect can ignore it for now. Her statement is most likely:

most appropriate because no conflict exists until the payment is actually made
most appropriate because the prospect was at least alerted to a possible fee
least appropriate because the prospect must evaluate the referral incentive before entering the service agreement

Question 13 of 14

A relationship manager receives a one-time internal referral payment for sending a client to the bank's brokerage desk. She tells the client only that she may receive 'extra compensation' and believes that naming the exact form and value would be unnecessary because it is a small amount. Her disclosure is most likely:

adequate because the client was warned that compensation exists
adequate because the payment is internal and small
inadequate because the client should be told the nature and value of the benefit

Question 14 of 14

An adviser pays current clients nominal gift cards and sometimes fee discounts when their referrals become especially lucrative. New clients often learn about these rewards later, after they themselves begin referring others. The adviser's practice is most likely:

acceptable because the rewards are modest
acceptable because all clients have the same chance to earn them
in violation because later awareness is not the required disclosure to incoming clients

Standard VI(B) - Referral Fees

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard

First Principles Thinking: governing standard