Welcome to Standard III: Duties to Clients
In the world of the CFA Institute, the client is king. While we learned in Standard I (Professionalism) and Standard II (Integrity of Capital Markets) that we must respect the law and the markets, Standard III focuses specifically on the "sacred" relationship between you and the people who trust you with their money. This is often where the most points are won or lost on the exam because the scenarios feel very "real-world."
We will break this down into five key sub-sections, focusing on how to put the client’s interests before your own and how to treat all clients fairly.
Standard III-A: Loyalty, Prudence, and Care
This is the "heart" of the duties to clients. It states that you have a duty of loyalty to your clients and must act with reasonable care and exercise prudent judgment. You must act for the benefit of your clients and place their interests before your employer’s or your own interests.
Key Concepts to Remember:
• The "Client" comes first: In most cases, the client is the person paying the fees. However, if you manage a pension fund, the "client" is not the company that hired you, but the beneficiaries of the pension (the workers who will receive the money later).
• Prudence and Care: You don't have to be right 100% of the time (no one can predict the market!), but you must act with the same care that a "prudent" person would in a similar professional capacity.
• Soft Dollars/Soft Commissions: If you use client brokerage commissions to buy "research" that helps you manage that specific client's money, it is generally okay. If you use those commissions to buy office furniture or software for your firm's benefit, you have violated this standard. This is called "directed brokerage."
• Proxy Voting: You don’t have to vote every single proxy (like routine administrative matters), but you must vote on issues that have a material impact on the investment's value, always acting in the client's best interest.
Quick Tip: If a question asks who you owe the most loyalty to, the hierarchy is: 1. The Law / Market Integrity, 2. The Client, 3. The Employer, 4. Yourself.
Key Takeaway: Always act in the client's best interest. If you benefit more from a trade than the client does, you are likely violating this standard.
Standard III-B: Fair Dealing
This standard requires you to deal fairly and objectively with all clients when providing investment analysis, making recommendations, or taking investment action.
Fair vs. Equal
A common trick on the CFA exam is confusing "fair" with "equal."
• Fair does not mean you have to give every client the same exact service.
• You can have different levels of service (e.g., a "Platinum" level that gets calls 10 minutes earlier than "Silver" level), provided that these levels are disclosed to all clients and the "Silver" clients aren't being disadvantaged on trade executions.
Best Practices for Fair Dealing:
• Simultaneous Dissemination: Try to get the word out to all clients at the same time.
• Trade Allocation: If an IPO is oversubscribed (more people want it than there are shares), you should allocate shares pro-rata (proportionally) across all participating client accounts. Never give all the "hot" shares to your biggest client or your own account first.
• Wait until everyone knows: If you change a recommendation from "Buy" to "Sell," you must give your clients a fair chance to act on that info before you sell the stock for your own account.
Key Takeaway: Don't play favorites with trade allocations. Treat all clients fairly, regardless of their account size.
Standard III-C: Suitability
This standard applies when you are in an advisory relationship. You must make a reasonable inquiry into a client's investment experience, risk/return objectives, and financial constraints before making any investment recommendations.
The IPS (Investment Policy Statement)
You must create an IPS for every client. Think of this as the "Rule Book" for that client's money. It should cover:
• Objectives: What is the target return? How much risk can they handle?
• Constraints: Do they need cash soon (liquidity)? What is their time horizon? Are there tax concerns or legal restrictions?
The "Portfolio Context"
Don't worry if this seems tricky at first: An investment might look super risky on its own (like a high-tech startup stock), but it might actually be suitable if it's only a tiny part (\( 1\% \)) of a very large, diversified portfolio. Always judge suitability based on the total portfolio, not the individual security.
Common Mistake to Avoid: Failing to update the IPS. You should update the IPS at least annually or whenever a major life event happens (like the client getting married or retiring).
Key Takeaway: "Know Your Client" (KYC). If it doesn't fit the IPS, don't buy it—even if it's a "great" stock.
Standard III-D: Performance Presentation
When communicating investment performance, you must make reasonable efforts to ensure that it is fair, accurate, and complete.
How to stay compliant:
• Don't Cherry-Pick: You cannot just show the performance of your best-performing accounts and ignore the ones that lost money.
• Use Composites: Instead of showing individual accounts, group "similar" accounts together into a composite (e.g., "All Growth Accounts").
• The "Brief" Rule: If you provide a brief or summarized performance report, you must state that more detail is available upon request. Do not mislead the client by leaving out accounts that have been closed.
Note: For the 2027 Level I exam, Global Investment Performance Standards (GIPS) are not examinable content. Stick to the general principle of being fair and accurate.
Key Takeaway: Never promise that "past performance guarantees future results" and never hide your losers.
Standard III-E: Preservation of Confidentiality
You must keep information about current, former, and prospective clients confidential.
The Three Exceptions:
You can break confidentiality only if:
1. The information concerns illegal activities on the part of the client.
2. Disclosure is required by law (e.g., a court order or subpoena).
3. The client permits you to share the info.
4. The information is requested by the CFA Institute Professional Conduct Program (PCP) for an investigation.
Did you know? This duty continues even after the client leaves your firm. You can't go around gossiping about a former client's financial troubles even years later.
Key Takeaway: Keep your mouth shut unless the law, the client, or the CFA Institute tells you to open it.
Quick Review: Standard III Summary
• III-A (Loyalty): Put the client first; act like a prudent professional.
• III-B (Fair Dealing): Don't favor certain clients over others in trades or info.
• III-C (Suitability): Use an IPS; look at the whole portfolio.
• III-D (Performance): Be honest and complete about your track record.
• III-E (Confidentiality): Keep client secrets unless legally forced to share.