Ethical and Professional Standards Q135

0. Dan Belkin works for Benedict Advisors. The firm advises and manages the portfolio of clients with various mandates. To cater to the increasing number of requests for diversification by including international equities, Belkin has been assigned the task of selecting a sub-adviser who specializes in this area. The selection must be made within the next six weeks. Belkin shortlists ten names from a database of fund managers who focus on this region. He eliminates those with a high expense ratio and a high turnover rate, and narrows the list to five. Due to shortage of time, Belkin has a brief interaction with each of the five fund managers to understand how they calculate returns, and does not go into their stock selection or due diligence process. He chooses the one with highest total returns in the past two years. In selecting the manager with highest returns, Belkin is most likely in violation of Standard relating to:

Answer
Comment
Array

Option : A
Explanation : He is in violation of Standard V(A) Diligence and Reasonable basis because he did not make reasonable efforts to analyze all aspects such as stock selection process, fees, investment philosophy, assets under management, or experience before selecting an adviser. Belkin is also in violation of Standard III(C) Suitability by not analyzing if the chosen manager’s services are appropriate for the firm’s clients and if the fee structure is low relative to the services offered.

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