NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
An investment adviser is asked by a client to recommend a product. The adviser knows that one product pays him a higher commission through a related party, but a cheaper product is equally suitable. Which action is most consistent with ethical conduct?
The adviser should disclose the conflict of interest to the client and recommend the product that serves the client's interest. Ethical conduct requires putting the client first and being transparent about any benefit the adviser receives, rather than hiding it or presenting information selectively.
- ARecommend the higher-commission product since both are suitable
- BDisclose the conflict of interest to the client and recommend the product that serves the client's interestCorrect
- CRecommend the cheaper product without telling the client about the commission
- DLet the client choose after describing only the benefits of the higher-commission product
Explanation
An adviser must act in the client's best interest and disclose any actual or potential conflict of interest. Recommending the higher-commission product just because it is suitable puts the adviser's interest ahead of the client's. Staying silent about the commission or giving one-sided information also fails the disclosure duty.
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