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CFA Level II · CFA Level II Exam

Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Standard V covers how you build and communicate investment views. V(A) requires diligence, independence and a reasonable basis for every recommendation or action. V(B) requires clear communication of process, limits and risks to clients. V(C) requires keeping records that support your work. On the exam, match each vignette fact to the correct Standard and its required action.

What this chapter covers

Standard V has three parts. V(A) Diligence and Reasonable Basis covers the work you do before you recommend or act. V(B) Communication with Clients and Prospects covers what you tell clients about that work. V(C) Record Retention covers the evidence you keep. Read together, they follow the life of one recommendation: research it, explain it, document it.

The guidance also covers practical situations. You may rely on secondary or third-party research, but you must check that it is sound. You may use quantitative models or group research, but you must understand their limits and be able to stand behind the output. You must separate fact from opinion and disclose the basic format and general principles of your process. Changes to that process must be communicated.

This chapter connects to the rest of the Ethics section. Standard V often overlaps with Standard I(B) Independence and Objectivity, Standard I(C) Misrepresentation, Standard III(A) Loyalty, Prudence and Care, and Standard III(C) Suitability. In Level II item sets, one vignette can test several Standards at once. You must name the Standard that fits the facts best and pick the action that fixes the breach.

Ethical and Professional Standards carries one of the larger topic weights at Level II (10-15%), and Standard V is a recurring source of vignette material. The questions are application-based, so rote memory of the text is not enough. You must spot the breach in the facts and choose the correct response. These items reward careful reading, and the rules are finite, so the effort you put in converts reliably into points. Since the scoring is by total score, with no minimum per topic, secure marks here help offset weaker areas.

Guidance for Standard V: Investment Analysis, Recommendations, and Actions: topics in the order to study them

  1. 1Standard V(A): Diligence and Reasonable BasisThis is the core duty. The other topics build on the idea that every recommendation needs a sound, documented basis.
  2. 2Using Secondary and Third-Party Research and ServicesIt extends V(A) to research you did not produce, and asks what checking is enough before you rely on it.
  3. 3Quantitative Models, Group Research and Investment DecisionsIt applies the same diligence to models and team work, including your duty to understand the limits and dissent within a group.
  4. 4Standard V(B): Communication with Clients and ProspectsOnce the basis is sound, you learn what to disclose about process, limitations and risks, and how to separate fact from opinion.
  5. 5Standard V(C): Record RetentionIt is the shortest topic and logically comes last in the life of a recommendation: keep the support for what you did and said.
  6. 6Applying Standard V: Cases and Compliance ProceduresDo this last. It tests all three parts together, which is how the exam presents them.

How to prepare Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Aim to recognise breaches quickly and state the required action in your own words. Treat the Standards as a set of duties, not text to memorise.

  1. Read the official text of V(A), V(B) and V(C) first. Write each in one sentence of your own.
  2. For each Standard, list the recommended procedures and note which duty each one supports.
  3. Study the guidance on third-party research and models. Write down what checking you must do and what you cannot delegate.
  4. Work through the guidance examples. For each, name the Standard breached, say why, and state the corrective action before you check the answer.
  5. Practise item sets with vignettes. Underline facts that signal a breach, such as undisclosed changes in process, unverified sources or missing records.
  6. Review cases where more than one Standard applies. Decide which fits best and note the links to I(B), I(C), III(A) and III(C).
  7. In the last week, do timed Ethics item sets and review every wrong answer by the exact wording of the Standard.

Common mistakes in Guidance for Standard V: Investment Analysis, Recommendations, and Actions

  • Naming the wrong Standard because several seem to fit.

    Fix: Ask what the core failure is: weak research, weak communication, or missing records. Choose the Standard that addresses that failure.

  • Assuming third-party research can be used without any checking.

    Fix: Remember you must make reasonable efforts to check that the research is sound. The source's reputation does not remove that duty.

  • Treating model output as a reasonable basis by itself.

    Fix: You must understand the model's assumptions and limitations and be able to explain the result. Output you cannot explain is not a sound basis.

  • Forgetting that changes to the investment process must be communicated.

    Fix: Look for any change in process in the vignette. If clients were not told promptly, V(B) is breached.

  • Treating records as personal property.

    Fix: Records created as part of employment belong to the firm. Check for permission before any copying or removal.

  • Choosing an answer that only reduces harm instead of correcting the breach.

    Fix: Choose the action that directly fulfils the duty, such as verifying the research, disclosing the limitation or dissociating from an unsupported group view.

Last-day revision: Guidance for Standard V: Investment Analysis, Recommendations, and Actions

  • V(A): exercise diligence, independence and thoroughness, and have a reasonable basis supported by research and investigation.
  • V(B): disclose the basic format and general principles of your investment process to clients and prospects, and promptly disclose changes.
  • V(B): identify important limitations and risks of your analysis and recommendations.
  • V(B): distinguish clearly between fact and opinion in communications.
  • V(B): include factors that are important to your analysis and recommendations.
  • V(C): develop and maintain records that support your analysis, recommendations, actions and communications.
  • Records belong to the firm. If you leave, you cannot take them without your employer's permission.
  • Third-party research: you must make reasonable efforts to confirm it is sound before relying on it.
  • Models: understand their assumptions and limits, and do not treat output as certain.
  • Group research: if you disagree with the group view and it lacks a reasonable basis, you may need to have your name dissociated from it.
  • Reasonable basis depends on the type of security and the client circumstances.
  • Overlapping Standards: always check I(B), I(C), III(A) and III(C) before you choose an answer.

Guidance for Standard V: Investment Analysis, Recommendations, and Actions in other exams

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

Guidance for Standard V: Investment Analysis, Recommendations, and Actions: frequently asked questions

What are the three parts of Standard V?

V(A) is Diligence and Reasonable Basis, V(B) is Communication with Clients and Prospects, and V(C) is Record Retention. Together they cover researching, explaining and documenting your recommendations and actions.

Can I rely on research from a third party?

Yes, but you must make reasonable efforts to confirm it is sound and appropriate before relying on it. The guidance expects you to apply judgement, not accept it blindly.

How are Standard V questions asked at Level II?

They appear in item sets, with a vignette and several questions. You must read the facts, decide which Standard is breached and choose the right corrective action.

Do I need to memorise the exact wording of the Standards?

You need to know the duties precisely enough to apply them. Learn the key phrases, such as reasonable basis and fact versus opinion, and practise using them on cases.