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CFA Level III · Level III Core

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

Standard V covers how you build and communicate investment advice. You need a reasonable and adequate basis for every recommendation (V(A)), must tell clients what drives your advice and its limits (V(B)), and must keep records that support your work (V(C)). To solve cases, match the facts to the sub-standard, then name the violation and the fix.

What this chapter covers

Standard V is the part of the CFA Institute Code and Standards that governs your day-to-day analytical work. It has three parts. V(A) Diligence and Reasonable Basis asks you to research properly, think independently and have support for what you say. V(B) Communication with Clients and Prospective Clients asks you to disclose your process, its limits and the risks, and to separate fact from opinion. V(C) Record Retention asks you to keep the records that support your analysis, recommendations and client communication.

The chapter also covers practical situations: relying on secondary or third-party research, and working in a group where several people produce one recommendation. In both, you stay responsible for what you put your name to. The guidance tests whether you checked the source, understood the method and can show what you did.

This chapter sits inside the Ethical and Professional Standards topic, which is part of the common core for every pathway. It links to other standards: Standard I(C) on misrepresentation, III(C) on suitability, and IV(C) on supervisors. It also supports portfolio work elsewhere in the paper, where a recommendation must fit the client's objectives and constraints. Ethics questions appear as item sets and may also appear in essay sets, so you need to apply the rules to a case, not just recall them.

Ethical and Professional Standards carries 10-15% of the topic weight at Level III, and Standard V is one of the seven standards you must be able to apply. Case-based questions reward you for spotting the exact sub-standard, the violation and the corrective action. The rules are short, so careful practice here helps you earn points. Each item set is worth 12 points, so a single set you handle well matters. There is no penalty for wrong answers, so always answer, but a systematic method turns guesses into informed choices.

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 rule of the chapter, and the other topics build on it.
  2. 2Using Secondary and Third-Party ResearchIt applies the diligence duty to research you did not produce yourself, so learn it right after V(A).
  3. 3Group Research and Decision MakingIt extends diligence to teams, including when you may stay associated with a group view and when you should dissociate.
  4. 4Standard V(B) Communication with ClientsOnce you know how to build a sound basis, you study how to explain it and its limits to clients.
  5. 5Standard V(C) Record RetentionIt is the shortest rule and is easiest to remember after you know what work needs to be documented.
  6. 6Application Cases for Standard VCases come last because they need all three sub-standards and show how the exam mixes them.

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

The goal is to apply Standard V quickly to a case. Learn the rules in your own words, then practise spotting them in facts.

  1. Read the official text of Standard V and write each sub-standard as one sentence in your own words.
  2. For each sub-standard, list the duties and the key conditions, such as what makes a basis reasonable and what a communication must include.
  3. For third-party and group research, write down what you must check before relying on it and what you do if you disagree.
  4. Do case questions one at a time. First name the sub-standard, then say whether there is a violation, then state the corrective action.
  5. Review each wrong answer and note which fact in the case you missed. Keep a short list of these triggers.
  6. For essay sets, answer the command word exactly. Name the standard, give the reason in one or two short sentences, and stop.
  7. Do a timed mixed set that includes other standards, because real cases often touch more than one.

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

  • Calling every weak recommendation a violation of V(A) without checking the facts

    Fix: Judge the process, not the result. Ask what research and investigation was done and whether it fits the type of security.

  • Assuming you can rely on a respected third-party report without checking it

    Fix: Remember that you must make reasonable inquiry into the assumptions and methods, whatever the reputation of the source.

  • Mixing up the group-research options

    Fix: If the view still has a reasonable basis, you may remain associated. Dissociate only when you believe it does not.

  • Treating V(B) as only about reports

    Fix: Apply it to any communication, including oral, and to process changes, limitations, risks and the split between fact and opinion.

  • Forgetting that V(C) records support more than recommendations

    Fix: Include analysis, actions and communications. Note that records are the firm's property, and that absent a regulatory requirement, CFA Institute recommends keeping them for at least seven years.

  • Writing long essay answers that name several standards

    Fix: Name the one standard that fits, give the reason in a short sentence and follow the command word.

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

  • V(A): exercise diligence, independence and thoroughness, and have a reasonable and adequate basis for recommendations and actions.
  • The basis must be supported by appropriate research and investigation.
  • Diligence depends on the facts, the type of security and the context, so more risk or complexity means more work.
  • Before relying on third-party research, make reasonable inquiry into its assumptions, methods and independence.
  • Do not simply copy others' work without checking it.
  • In a group, you may stay associated with the group view if you believe it has a reasonable basis, even if you disagree.
  • If you think the group view lacks a reasonable basis, you should dissociate from it.
  • V(B): disclose the basic format and general principles of your investment process, and promptly tell clients of material changes.
  • Separate fact from opinion in reports, and include the factors that are important to your recommendations.
  • Tell clients about the limitations and risks of your analysis and recommendations.
  • V(C): develop and keep appropriate records supporting your analysis, recommendations, actions and client communications.
  • Records belong to the firm, and they may be kept in any medium, written or electronic.
  • Absent a regulatory requirement, CFA Institute recommends retaining records for at least seven years.

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 does Standard V cover in the CFA Level III exam?

It covers diligence and reasonable basis, communication with clients and prospective clients, and record retention. Questions give you a case and ask you to identify violations or the right action.

Can I rely on research written by someone else?

Yes, but you must make reasonable inquiry first. Check the assumptions, the methods and whether the source is independent and credible. Relying on it without that check can breach V(A).

What should I do if I disagree with a group recommendation?

Decide whether the group view still has a reasonable basis. If it does, you may remain associated with it. If you believe it does not, you should dissociate from it.

Is Standard V tested as item sets or essays?

It can appear in either format as part of the Ethical and Professional Standards topic. Practise both: choosing from options in item sets and writing short, exact answers in essays.

How long should I keep records under Standard V(C)?

Absent a regulatory requirement, CFA Institute recommends retaining records for at least seven years. The records belong to the firm and may be kept in written or electronic form.