Level III Core · Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Standard V(A) Diligence and Reasonable Basis Explained

Updated 8 October 2026 · Fact-checked

Standard V(A) requires you to exercise diligence, independence and thoroughness when analysing investments, making recommendations or taking investment actions. You must also have a reasonable and adequate basis for each, supported by appropriate research and investigation. To solve a question, test whether the work done justified the conclusion.

Understand Standard V(A) Diligence and Reasonable Basis

Standard V(A) is about the quality of the work behind an investment view. Before you tell a client to buy, sell or hold, you must have done enough sound work to support that view. The standard applies to analysis, recommendations and actions. An action can be a trade or a portfolio decision, not only advice.

Three words matter. Diligence means real effort and care. Independence means your conclusion comes from your own judgment, not from pressure or convenience. Thoroughness means you looked at enough of the relevant facts, not only the ones that support the story. Together they give the reasonable basis: a conclusion that a sensible, informed peer would see as supported by the evidence.

The standard does not demand a perfect result. An investment can lose money and you can still comply, if the process was sound. The reverse also holds. A recommendation that made money can violate the standard if it rested on a rumour or on no research. The exam tests the process, not the outcome.

The standard also covers the use of other people's work. You may rely on secondary or third-party research, but you must make reasonable efforts to confirm it is sound. The same applies to quantitative models, and to the work of others in your firm. The depth of checking depends on the situation. Relying on a well-known, reputable source needs less checking than relying on an unknown source.

Finally, the standard asks for judgment about how much research a case needs. A simple, low-risk, familiar security needs less than a complex or unfamiliar one. Firms should have written policies that set minimum expectations, and members should know them and follow them.

Key rules to remember

Core requirement: Diligence + Independence + Thoroughness → Reasonable and adequate basis; Applies to every analysis, recommendation or action. The basis must be supported by appropriate research and investigation.
Test of compliance: Compliant if the process supports the conclusion, whatever the outcome; Investment losses alone are not a violation. A lucky gain with no research can still be a violation.
Reliance on others: Use of third-party research or models → make reasonable efforts to check them; Greater checking is needed when the source is unfamiliar or the work is complex. Blind reliance fails the standard.
Group work: A member in a group who disagrees with the group's conclusion should dissociate from it where appropriate. A member who relies on the group's work without dissociating is not in violation if they reasonably believe the group's work has a reasonable and adequate basis.; Dissociation is the route for a member who disagrees. Reliance without dissociation is acceptable only where the member reasonably believes the group's work is sound.
Recommended procedures: Written policies + defined research standards + quantitative-model checks + selection of outside advisers or vendors with care; Firms should set minimum research requirements and review the reasoning behind recommendations.

How to solve Standard V(A) Diligence and Reasonable Basis questions

Use the same sequence for any vignette or constructed response on Standard V(A). It keeps your answer short and tied to the points markers look for.

1Identify the investment analysis, recommendation or action in the facts. Note who did it and what the client or employer relied on.
2List what research or investigation was actually done. Note anything skipped, such as no check of the source, no review of model assumptions, or no look at the risks.
3Ask whether the basis was reasonable and adequate for this type of security, client and level of risk. A complex or unfamiliar product needs more work.
4Check independence. Was the conclusion shaped by pressure, a third party's view or a convenient shortcut?
5If others' work was used, ask whether the member made reasonable efforts to confirm it was sound. Consider the source's reputation and the member's own ability to check.
6Decide: violation or no violation. Do not judge by whether the investment gained or lost.
7State the corrective step if asked, such as doing further research, updating the model review, withdrawing the recommendation, or following firm policy.
8Answer using the exact command word. For 'justify', give the standard name plus the one fact that decides it.

Quickest way: Process-not-outcome check

When to use it: Use it for item set questions where you have about two minutes and need to eliminate options fast.

Cross out any option that judges compliance by profit or loss.
Look for the single fact about the work done: unverified source, untested model, no research, or rushed review.
If that fact shows a basis that is missing or thin for the situation, choose violation.
If the member checked the source, understood the model and the firm's policy was followed, choose no violation.
Prefer the option that names a practical fix such as verifying the source or reviewing the model assumptions.

Common mistakes in Standard V(A) Diligence and Reasonable Basis

Deciding a violation because the investment lost money.
Candidates link a bad outcome to bad conduct.
Fix: Judge the research and process. A sound process with a loss is not a violation.
Saying any use of third-party research is a violation.
Candidates over-apply the idea that you must do all research yourself.
Fix: Reliance is allowed if you make reasonable efforts to check that the research is sound.
Assuming a reputable source needs no checking at all.
Candidates swing too far the other way after learning that reliance is allowed.
Fix: A reputable source needs less checking, not none. Look for whether the member did a reasonable review.
Applying the standard only to written recommendations.
The word 'recommendation' suggests a report to a client.
Fix: Remember it covers analysis and actions too, including trades and portfolio changes.
Treating the same research depth as right for every security.
Candidates memorise a fixed checklist.
Fix: Scale the work to the complexity, risk and familiarity of the investment and the client's circumstances.
Confusing V(A) with V(B) communication duties.
Both sit in Standard V and deal with recommendations.
Fix: V(A) is about the quality of the basis. V(B) is about what you tell clients and how you present it.

Worked examples

Example 1

An analyst at a global asset manager is asked to add a thinly traded corporate bond to client portfolios. She reads a one-page note from a broker she has not used before. The note gives a credit view but no data. She recommends the bond to clients the same day. The bond later performs well. Did the analyst violate Standard V(A)? Justify your answer.

Show the solution

Identify the action: a recommendation to buy a thinly traded bond, based on a broker note.
List the work done: she read only one page from an unfamiliar source with no supporting data. She did no independent review of credit quality or liquidity.
Assess adequacy: a thinly traded bond carries credit and liquidity risk, so more research is needed than for a simple, liquid security.
Check reliance: she made no reasonable effort to confirm the broker's view was sound.
Ignore the outcome: good performance later does not create a reasonable basis.

Answer: Yes, she violated Standard V(A). She had no reasonable and adequate basis supported by research, because she relied on an unverified source for a complex, less liquid bond. The later gain does not change this, since compliance is judged by the process.

Example 2

A portfolio manager uses a third-party risk model that her firm has used for several years. The vendor is well established. Before the latest update, she reviews the vendor's release notes, runs the model on a sample portfolio and compares outputs with the prior version. Results differ slightly, and she documents why. Later, a market shock causes losses larger than the model predicted. Did she violate Standard V(A)?

Show the solution

Identify the action: reliance on a quantitative model in managing portfolios.
List the work done: reviewed release notes, tested on a sample portfolio, compared with the prior version, documented differences.
Assess adequacy: these are reasonable efforts to confirm the model is sound, and the source is established.
Consider independence and thoroughness: she did her own checks rather than accepting the update without review.
Consider the outcome: losses beyond the model's prediction reflect market conditions and do not show a failure of process.

Answer: No violation. She made reasonable efforts to verify the model and documented them, so she had a reasonable basis. The larger loss is an outcome and does not by itself breach Standard V(A).

Exam tips

Look for the one fact that shows the work done: verified or unverified source, tested or untested model. That fact usually decides the answer.
Never pick an option that judges the decision by profit or loss alone.
In essays, name the standard, state violation or no violation, and give the deciding fact in one sentence. Extra text earns no extra points.
When asked for corrective actions, give specific steps such as verifying the source, reviewing model assumptions, or following firm research policy.
Expect V(A) to appear next to V(B) and the third-party research guidance. Read carefully to see whether the issue is the research or the communication.

Standard V(A) Diligence and Reasonable Basis in other exams

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

Standard V(A) Diligence and Reasonable Basis: frequently asked questions

What is a reasonable basis under CFA Standard V(A)?

It is a conclusion supported by appropriate research and investigation, in line with the type of investment and client situation. A sensible, informed peer should see it as justified by the evidence. It does not need to produce a profit.

Can I rely on third-party research under Standard V(A)?

Yes, but you must make reasonable efforts to confirm it is sound. The more complex or unfamiliar the research, or the less known the source, the more checking you need. Blind reliance is not acceptable.

Does Standard V(A) apply only to recommendations?

No. It covers investment analysis, recommendations and actions. A trade or portfolio decision you take needs a reasonable basis just as a written recommendation does.

What are the recommended procedures for compliance with Standard V(A)?

Firms should set written research standards and review the basis for recommendations. They should also test quantitative models, and choose outside advisers and vendors with care. Members should know and follow these policies.