CFA Level II 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 you to act for the benefit of your clients and place their interests before your employer's and your own. You must act with reasonable care and exercise prudent judgment. To solve a question, identify the client, spot the conflict, and choose the action that puts the client first.

Understand Loyalty, Prudence, and Care (Standard III(A))

Standard III(A) has two linked duties. Loyalty means you put client interests ahead of your employer's and your own. Prudence and care means you act as a careful person would in managing the client's assets, using reasonable skill and judgment.

The standard also covers fiduciary duty. Where you are a fiduciary, you must act in the client's best interest and follow the higher standard of care. Where laws or rules differ, you follow the stricter one. The standard applies whether or not a formal fiduciary relationship exists, as the duty is owed in your dealings with clients.

The first step is always identifying the client. It may be an individual, but it may also be a trust's beneficiaries, a pension plan's participants and beneficiaries (not the plan sponsor), or the investors in a fund (not the fund manager). The duty runs to that client. Where the client is unclear, you should work out who it is at the start of the engagement and keep to that. Your duty may also differ by the type of role, such as when you are advising versus managing.

Two practical areas are tested often. Proxy voting: voting rights are an asset of the client, so you should vote in the client's interest, but cost-benefit judgment is allowed. It can be reasonable not to vote if the cost of voting outweighs the expected benefit. Soft dollars (soft commissions): brokerage commissions paid by the client can be used only for goods and services that benefit the client, such as research that supports investment decisions. They must not be used for your own overhead. You should seek best execution, meaning the most favorable overall terms for the client, not simply the lowest commission.

Good practice also includes written policies on proxy voting, best execution, and soft dollars, disclosing to clients how these work, and clear documentation. You should also make sure that client assets are used for the client's benefit and that you keep the client informed of material matters.

Key formulas to remember

Core duty: Client interests > employer interests and personal interests; When interests conflict, the client comes first. Employer interests are not ignored, but they cannot override the client.
Prudence test: Act as a prudent person would, with reasonable care and judgment; Judged on the process and the facts known when the decision was made, not on hindsight results.
Who is the client?: Trust: beneficiaries | Pension plan: participants and beneficiaries | Fund: investors; The duty is owed to the underlying beneficiaries, not the sponsor or the fund manager.
Soft dollar rule: Soft dollars may be used only for client-benefiting goods and services; Research that helps investment decisions qualifies. Office rent and staff salaries do not.
Best execution: Best execution = most favorable overall terms for the client; Not always the lowest commission. Consider price, speed, liquidity, and certainty of execution.
Proxy voting: Vote in the client's interest; skip only if cost exceeds expected benefit; Document the policy and rationale. Disclose the policy to clients.

How to solve Loyalty, Prudence, and Care (Standard III(A)) questions

Use this sequence on any Standard III(A) item in a vignette. Most answers come from the first three steps.

1Read the question stem first so you know which person's conduct you are judging.
2Identify the client in the vignette. Check whether it is an individual, a trust, a plan, or a fund, and who the beneficiaries are.
3Find the conflict. Look for employer pressure, personal benefit, commissions, soft dollar use, or a voting decision.
4Ask whether the action benefits the client first. If it favors the employer, a sponsor, or the analyst, it likely violates the standard.
5Check prudence. Did the analyst follow a reasonable process, document it, and seek best execution?
6Check disclosure and policy: are there written policies and was the client told about them?
7Pick the option that names the violation, or the corrective action, using the Standard's exact name: Standard III(A).
8Reread the vignette to confirm the facts support your choice.

Quickest way: Client-first filter

When to use it: Use when time is short and the three options differ mainly in whose interest is served.

Name the client in a few words.
Ask who benefits from the action in the option.
Eliminate options where the employer, sponsor, or the analyst benefits at the client's expense.
Between what remains, prefer the one with a documented, reasonable process and disclosure.
For soft dollars, check that the service benefits the client. For proxies, check that the vote serves the client.

Common mistakes in Loyalty, Prudence, and Care (Standard III(A))

Treating the plan sponsor or the employer as the client
The sponsor pays the fee or gives instructions, so it feels like the client.
Fix: For a pension plan, the duty runs to participants and beneficiaries. For a fund, it runs to the fund's investors.
Judging prudence by the outcome
A losing trade looks like a breach.
Fix: Prudence is about the process and the facts available at the time. A loss alone is not a violation, and a gain does not excuse a poor process.
Assuming the lowest commission always means best execution
Cost is easy to compare.
Fix: Best execution means the most favorable overall terms, including price, liquidity, and certainty, not just commission.
Thinking soft dollars are always prohibited
The term sounds like a bribe.
Fix: They are allowed when the goods or services benefit the client, such as investment research. They are not allowed for the firm's own overhead.
Believing every proxy must be voted
Voting rights are a client asset, so skipping seems wrong.
Fix: A cost-benefit judgment is acceptable. Not voting can be reasonable when the cost exceeds the expected benefit, if it is documented and consistent with the policy.
Letting the employer's interests override the client
Employees feel loyal to the firm and its instructions.
Fix: Employer interests matter, but the client comes first when they conflict. Follow the stricter rule if law and the Code differ.

Worked examples

Example 1

Vignette: Meera Iyer manages a corporate pension plan for Brightline Ltd. The plan's investment committee, led by Brightline's CFO, asks her to buy Brightline bonds for the plan to help the company raise funds. Meera's analysis shows the bonds are fairly priced but would leave the plan concentrated in one issuer relative to its investment policy. Question 1: Who is Meera's client? Question 2: What should she do?

Show the solution

Identify the client: for a pension plan, the duty runs to the plan participants and beneficiaries, not to Brightline as sponsor.
Find the conflict: the sponsor wants to benefit its own financing, while the plan's policy limits concentration.
Apply the standard: loyalty requires putting the participants' interests ahead of the sponsor's and her own. Prudence requires she follow the investment policy.
Choose the action: she should decline the purchase if it breaches the policy and explain her reasoning in writing.

Answer: Q1: the plan participants and beneficiaries. Q2: she should not buy the bonds beyond what the investment policy and prudence allow, and should document her decision. Violating this would breach Standard III(A).

Example 2

Vignette: Daniel Ortiz, a portfolio manager at Northgate Asset Management, directs client trades to Harlow Securities, which charges slightly higher commissions. In return, Harlow provides Northgate with a research platform used for client portfolio decisions, and also pays for Northgate's office furniture. Harlow's execution quality is comparable to other brokers. Question 1: Is the research platform acceptable? Question 2: Is the furniture acceptable?

Show the solution

Recall the soft dollar rule: client commissions may buy only goods and services that benefit the client.
Test the research platform: it supports investment decisions for client portfolios, so it benefits the client.
Check best execution: execution quality is comparable, so the higher commission is supported by the research value.
Test the furniture: office furniture is a firm overhead cost that does not benefit clients, so using client commissions for it breaches the duty of loyalty.

Answer: Q1: acceptable, if best execution is maintained and the practice is disclosed. Q2: not acceptable, because client commissions are being used for the firm's own benefit, a violation of Standard III(A).

Exam tips

Always name the client first. Many wrong options fail because they serve the sponsor, employer, or manager.
When two options look alike, choose the one with a documented process and disclosure.
Do not mark an action a violation just because the trade lost money. Look for the process failure or the conflict.
For soft dollars, sort each item into client-benefiting or firm-benefiting. Research is usually in. Overhead is out.
If law and the Code conflict, the stricter rule applies, and this often decides the answer.

Loyalty, Prudence, and Care (Standard III(A)) 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 (Standard III(A)): frequently asked questions

Who is the client under Standard III(A)?

It depends on the arrangement. For an individual it is the person, for a trust it is the beneficiaries, for a pension plan it is the participants and beneficiaries, and for a fund it is the fund's investors. Work this out first because the duty is owed to that party.

Are soft dollars allowed under the CFA Standards?

Yes, when the goods or services benefit the client, such as investment research. They are not allowed for the firm's own costs such as rent or salaries. You should also seek best execution and disclose the practice.

Do I have to vote every proxy?

Not always. Voting rights belong to the client, so you should vote in the client's interest. A cost-benefit judgment is allowed, and it can be reasonable not to vote if the cost exceeds the expected benefit, provided it is consistent with your policy.

What does prudence mean in Standard III(A)?

It means acting with the care, skill, and judgment that a careful person would use. It is judged on the process and the information available at the time, not on hindsight results.