CFA Level I Exam · Guidance for Standard III: Duties to Clients

Standard III(A) Loyalty, Prudence and Care Explained

Updated 7 October 2026 · Fact-checked

Standard III(A) requires members and candidates to act for the benefit of their clients, place client interests before their employer's and their own, and act with the care, skill, prudence and diligence a prudent person would use. To solve questions, first identify who the client is, then test each action against client benefit.

Understand Loyalty, Prudence, and Care

Standard III(A) is the core duty you owe to clients. In essence, the Standard says members and candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. They must act for the benefit of their clients and place their clients' interests before their employer's or their own interests.

There are three ideas. Loyalty means the client comes first. If your interest, or your firm's, conflicts with the client's, the client wins. Prudence means you act as a careful, skilled person would in the same circumstances, and you judge each decision on the information available at the time. Care means diligence: you do the work properly, document it and monitor it.

Prudence is judged by process, not by outcome. A reasonable investment that loses money is not a violation. A careless or self-serving decision that happens to make money can still be one. Examples of good practice include following the client's mandate, pursuing best execution when you handle trades, and voting proxies where you have a duty to do so, with a cost-benefit view.

You must also work out who the client is. For an individual, it is that person. For a trust, the client is the trust itself, and your duty runs to the trust's beneficiaries, even if the trustee hired you. For a pension plan, the client is the plan participants and beneficiaries, not the plan sponsor or its management. In such cases, loyalty runs to the beneficiaries even if the sponsor pays your fee.

The Standard also covers soft dollars. Client brokerage commissions belong to the clients. You may use them only for research and services that benefit clients, not to pay your firm's own overheads. Where the law and the Code and Standards differ, follow the stricter of the two (Standard I(A)), and place client interests ahead of the firm's wishes. Disclose conflicts, and when you cannot resolve them, decline or step back.

Key formulas to remember

Loyalty rule: Client interest > employer interest and personal interest; When interests conflict, act for the client's benefit. Disclosure alone does not excuse putting yourself ahead.
Prudence test: Judge the decision process at the time, not the result; Ask what a prudent person would do with the same facts. A loss alone is not a violation.
Who is the client?: Individual = the person; Trust = the trust (duty runs to its beneficiaries); Plan = participants and beneficiaries; The sponsor or manager who pays or hires you is not the client. A trustee who hires you acts for the trust, so your duty runs to its beneficiaries.
Soft dollar rule: Client commissions → only for client-benefiting research and services; Using them for the firm's own expenses breaches loyalty.
Care in practice: Follow the mandate, seek best execution, document, monitor; Departing from the investment policy or mandate without the client's agreement is a red flag.

How to solve Loyalty, Prudence, and Care questions

Use this sequence for any Standard III(A) question. It works for loyalty, prudence and client identification.

1Identify the client. Is it an individual, a trust with beneficiaries, or a plan with participants?
2List the interests in play: client, employer, the analyst personally, and any third party such as a sponsor or trustee.
3Check for a conflict. Does the action benefit the member or the firm at the client's expense?
4Apply loyalty. If there is a conflict, the client's benefit must come first, even if the employer objects.
5Apply prudence and care. Was the decision made with reasonable skill, diligence and a documented process, based on facts available then?
6Check the mandate and client instructions. Actions outside them need the client's agreement.
7Pick the option that puts the client first and keeps the process sound. Eliminate options that favour the firm, the sponsor or yourself.

Quickest way: Three-second client-first filter

When to use it: Use it when you have about 90 seconds per question and the three options differ mainly in whose interest they serve.

Underline who the client is in the stem. Trust means the trust, with duty to its beneficiaries; plan means participants and beneficiaries.
Strike any option that serves the employer, the sponsor or the member first.
Strike any option that judges prudence by outcome alone or ignores the mandate.
Choose the remaining option that follows the mandate, is documented and benefits the client.

Common mistakes in Loyalty, Prudence, and Care

Treating the person who pays the fee as the client
It feels natural to serve whoever hires you, such as a plan sponsor or company management.
Fix: For plans, the client is the participants and beneficiaries. For trusts, the client is the trust and your duty runs to its beneficiaries. Loyalty runs to them, not to whoever pays you.
Judging prudence by whether the investment made money
Students think good results prove good judgment.
Fix: Prudence is about process and information at the time of the decision. A loss is not automatically a violation, and a gain does not cure a careless process.
Believing disclosure fixes any conflict
Standard VI(A) stresses disclosure, so students over-apply it.
Fix: Under III(A) the client's interest must still come first. Disclosure helps but does not permit putting your own interest ahead.
Putting the employer's interest ahead of the client's
Employment duties under Standard IV make loyalty to the firm seem primary.
Fix: Client interests come before employer interests. You can follow employer instructions only if they do not harm clients.
Allowing soft dollars to fund firm expenses
Students see commissions as a firm resource.
Fix: Client brokerage belongs to clients. Use it only for research or services that benefit them.

Worked examples

Example 1

An analyst manages a corporate pension plan. The plan sponsor's CFO asks her to shift assets into the sponsor's own debt to support its credit rating, though the plan's investment policy does not call for it and the debt is poor value. What should she do? A) Follow the CFO, because the sponsor pays her fee. B) Decline, because her duty is to the plan participants and beneficiaries. C) Follow the CFO only if she discloses the request to the board.

Show the solution

Identify the client. For a pension plan, the client is the participants and beneficiaries, not the sponsor.
The request benefits the sponsor, not the beneficiaries, and departs from the investment policy. That is a conflict.
Loyalty requires putting beneficiaries first, and prudence rejects a poor-value, off-mandate purchase.
Option A confuses the payer with the client. Option C treats disclosure as a cure, but the trade still harms the beneficiaries.

Answer: B

Example 2

A manager buys a diversified, mandate-consistent bond portfolio for a client after documented analysis. Rates then rise unexpectedly and the portfolio loses value. Has the manager violated Standard III(A)? A) Yes, because the client suffered a loss. B) No, because the decision followed a prudent, documented process on facts available at the time. C) Yes, because prudence requires guaranteeing capital.

Show the solution

Prudence is judged on the decision process and the information available when the decision was made.
The portfolio was diversified, consistent with the mandate and supported by documented analysis.
An unexpected rate move is a market outcome, not evidence of carelessness.
Option A uses the outcome as the test. Option C invents a duty to guarantee capital that the Standard does not impose.

Answer: B

Exam tips

Always name the client first. Trust questions point to the trust and its beneficiaries; pension questions point to participants and beneficiaries.
If an option favours the employer, sponsor or member over the client, eliminate it.
Remember prudence is process-based. Be wary of options that say a loss proves a violation.
Watch for soft dollar stems. The correct option uses commissions only for client-benefiting services.
With three options and no penalty for wrong answers, always answer. Narrow to two using the client-first filter, then pick the one that keeps the process sound.

Practice questions from Guidance for Standard III: Duties to Clients

Loyalty, Prudence, and Care in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Loyalty, Prudence, and Care: frequently asked questions

What does Standard III(A) require in simple terms?

You must act for your clients' benefit and put their interests before your employer's and your own. You must also use the care, skill, prudence and diligence a careful person would use in the same situation.

How do I identify the client in a trust or pension plan?

In a trust, the client is the trust itself, and your duty runs to its beneficiaries, even if the trustee hired you. In a pension plan, the client is the plan participants and beneficiaries, not the sponsor. The person who hires or pays you may not be the client.

Is a losing investment a violation of prudence?

Not by itself. Prudence is judged by the decision process and the information available at the time. A loss is a violation only if the process was careless, off-mandate or self-serving.

Can I use client commissions to pay for firm research?

Only if the research or service benefits the clients whose commissions pay for it. Using client brokerage for the firm's own expenses breaches the duty of loyalty.