Ethical and Professional Standards Q127

0. Alex Karachanis, CFA, is an independent financial advisor with a roster of over 100 clients. Along with advisory services, he also facilitates in executing the trades for his clients and manages their portfolio. Adonia Papadakis signed up Alex in November 2013 to advise and manage her portfolio. After detailed discussions on Adonia‟s circumstances and return requirements, it was agreed that only large cap equity investments will be made. In mid-2013 Alex felt that large cap stocks were excessively overvalued and shifted 50% of the portfolio to small-cap stocks. Over the next six months, small-cap stocks significantly outperformed large cap stocks. It is now January 2014 and Adonia has just received her account statement for 2013. She is very happy with the performance of her portfolio. Which Standard did Alex least likely violate?

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Option : A
Explanation : Standard V(B) Communication with Clients and Prospective Clients is violated because Alex should have discussed the change with the client before moving to small cap stocks. Standard III(C) Suitability is violated because small cap stocks did not correspond to client’s risk profile (even though they ended up performing well). Standard III(D) Performance Presentation is least likely violated, because the question does not provide enough information to infer that the account statement was not fairly presented.

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