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FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities

Which control most effectively addresses the risk that advisers recommend unsuitable products to retail clients because of sales incentives?

The best control is to align adviser remuneration with client outcomes and advice quality instead of pure sales volume. Sales-driven incentives create conflicts of interest that cause unsuitable recommendations, so changing the incentive structure targets the root cause, unlike generic disclaimers or weaker monitoring.

  1. AAligning adviser remuneration with client outcomes and quality of advice rather than only sales volumeCorrect
  2. BIncreasing the number of product lines available to advisers
  3. CRelying on clients to sign a general acknowledgement of risk at onboarding
  4. DReducing the frequency of conduct risk monitoring to lower costs

Explanation

Volume-based incentives create a conflict of interest that drives mis-selling. Remuneration tied to advice quality and client outcomes addresses the root cause. A generic client acknowledgement does not replace a suitability assessment, and weaker monitoring or wider product ranges do not reduce the conflict.

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