Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

An investment advisor accepts additional compensation from a client. Which measure should be prioritized according to CFA standards?

1. Client satisfaction should be maximized at all times.

2. Disclosure of the compensation arrangement to all relevant parties.

3. Consistent performance over a long-term should be maintained.

4. Advisors should seek written consent from all clients.

The correct answer is: Disclosure of the compensation arrangement to all relevant parties.

The correct choice emphasizes the obligation of investment advisors to provide full and fair disclosure regarding any compensation arrangements. According to CFA standards, transparency is crucial in maintaining the integrity of the advisor-client relationship. By disclosing the additional compensation received, advisors help clients understand potential conflicts of interest that may arise from such arrangements. This transparency allows clients to make informed decisions based on a complete understanding of the advisor’s incentives. Prioritizing disclosure aligns with the CFA's ethical guidelines, which stress the importance of honesty and transparency in all aspects of the advisory relationship. Failure to disclose could lead to a breach of trust and could mislead clients about the advisor's motivations, ultimately undermining the advisor's credibility and the effectiveness of the advisory relationship. While client satisfaction, consistent performance, and obtaining written consent are important aspects of investment advisory services, they do not take precedence over the need for robust disclosure. Ensuring that clients are aware of all compensation arrangements is essential to uphold ethical standards and maintain the quality of client relations.