NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
An adviser, Mr. Arjun Mehta, is paid a fixed advisory fee by a client. He also holds an undisclosed arrangement to receive a referral fee from a broker whenever he steers the client to that broker for execution. Which statement is the most accurate ethical position?
The arrangement is impermissible as structured. An undisclosed referral fee is a conflict of interest, and the adviser must disclose it to the client and ensure it does not influence advice. Competitive broker charges or the client not asking do not cure the non-disclosure.
- APermissible, because the advisory fee is separately agreed
- BPermissible, as long as the broker's charges are market-competitive
- CPermissible if the client does not ask about it
- DImpermissible, since the referral benefit is a conflict of interest that must be disclosed and the adviser should not let it influence recommendationsCorrect
Explanation
A hidden referral payment gives the adviser a personal incentive that can distort execution advice. Ethical practice requires disclosure of such conflicts to the client and ensuring they do not influence recommendations. Competitive broker charges or the client's silence do not remove the duty to disclose.
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