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

A portfolio manager has an investment management agreement that restricts a client's account to investment-grade bonds. The manager believes a small allocation to high-yield bonds would improve returns. Under Standard III(A), the manager's most appropriate action is to:

The manager should follow the investment parameters in the agreement unless the client agrees to change them. Prudence requires following client-set parameters, and governing documents are the primary determinant of the manager's powers and duties, so acting contrary to them risks violating Standard III(A).

  1. Aadd the high-yield bonds because the expected return benefits the client
  2. Bfollow the agreement's parameters unless the client agrees to change themCorrect
  3. Cinvest in high-yield bonds only if the manager discloses it after the trade

Explanation

Prudence requires following the investment parameters set by the client while balancing risk and return. The governing documents are the primary determinant of the manager's powers and duties. Acting contrary to them puts the manager at risk of violating Standard III(A), even if the intent is to help the client.

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