NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
Caselet: Mr. Rakesh Nair, aged 68 and retired, has told his adviser that he needs stable income and cannot tolerate capital losses. His adviser, wishing to earn a higher commission, recommends a concentrated portfolio of small-cap equity schemes. Which ethical principle is most directly breached?
The principle of suitability is breached. Advice must match the client's risk tolerance, needs and financial situation. Recommending concentrated small-cap equity to a retired client who needs stable income and cannot bear losses ignores his profile, and the commission motive makes it worse.
- ASuitability of advice to the client's risk profileCorrect
- BTimely renewal of the adviser's registration
- CMaintenance of records for five years
- DUse of a standard agreement format
Explanation
Advice must match the client's risk profile, objectives and capacity. A retiree needing stable income with no loss tolerance is unsuited to concentrated small-cap equity. The commission motive adds a conflict of interest, but the principle most directly violated is suitability.
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