NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues
Mr. Raman Iyer, an investment adviser, recommends a mutual fund scheme to a client and does not mention that the fund house pays his related firm a referral fee for it. Which ethical issue does this primarily represent?
This is a failure to disclose a conflict of interest. The referral fee from the fund house could bias the recommendation, so the adviser must tell the client about it up front. Not disclosing it undermines the client's ability to judge whether the advice is objective.
- AFailure to disclose a conflict of interestCorrect
- BExcessive diversification of the client portfolio
- CBreach of the client's risk tolerance limit
- DDelay in executing the client's instructions
Explanation
A fee received from a product provider creates a potential conflict of interest, since the recommendation may be influenced by the payment rather than the client's needs. Ethical practice requires the adviser to disclose such conflicts to the client in advance. The other options do not describe the facts given.
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