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Reading 4CFA L1 EthicsFull chapter

Standard III — Duties to Clients

In this chapter: III(A) Loyalty, Prudence, Care · III(B) Fair Dealing · III(C) Suitability · III(D) Performance · III(E) Confidentiality

~3 min readLayer 4 · Professional CertificationsFree

Standard III governs client relationships. Five sub-standards: loyalty (fiduciary-style duty), fair dealing (no client favouritism), suitability (recommendations match circumstances), performance presentation (truthful), confidentiality.

Foundation

III(A) Loyalty, Prudence, Care: act in client interest above own. Document decisions. Avoid conflicts; if unavoidable, disclose + manage. III(B) Fair Dealing: treat all clients fairly. When disseminating recommendations, all clients receive simultaneously. III(C) Suitability: recommendations match client's circumstances. Risk profile + goals + constraints. Document the matching. III(D) Performance Presentation: true and accurate. Use Time-Weighted Returns; show benchmarks; disclose net of fees. Don't cherry-pick periods. III(E) Confidentiality: client information not shared without consent. Exception: legal/regulatory required. Maintain even after relationship ends.

Deep Dive

III(A) practical application: soft-dollar arrangements (broker provides research in exchange for trading) must be in client interest, properly disclosed. III(B) — when issuing recommendation, all clients should receive simultaneously. Favouring one client (especially family/friends) violates. III(C) — Indian context: SEBI IA regulations require formal IPS + risk profiling — partial compliance with suitability. CFP-FPSB: even more rigorous. III(D) — performance presentation often violated subtly: "fund returned 20% last year" without context; "since inception 15%" with cherry-picked starting period. CFA tests recognition. III(E) — confidentiality strict. Client info not for cocktail-party discussions; not shared with insurance reps, brokers, etc. without consent.

Advanced

Most common Indian retail violation: III(C) Suitability. Adviser recommends what they get higher commission on rather than what fits client. Modern advisors: SEBI IA registration documentation forces this discipline. III(D) advanced: GIPS Standards (Global Investment Performance Standards) — voluntary global standards for performance reporting. CFA L1 introduces; L2 dives in. III(E) survives the relationship: confidential info from former client cannot be used or shared. Common scenario: ex-employee lists former clients' positions for new employer = violation.

Regulatory references
  • CFA Standards III(A)-(E)
  • SEBI IA Regulations 2013
  • AMFI Code of Conduct
Common mistakes & pitfalls
  • Recommending unsuitable products for higher commission.
  • Sharing client info casually.
  • Cherry-picking performance periods.
  • Favouring some clients in dissemination.

Frequently asked

Soft-dollar arrangements legitimate?
Yes if used for client research (not entertainment, etc.) and properly disclosed. SEBI permits with disclosure. CFA III(A) requires they be in client interest.
Can I share client info with insurance broker for cross-sell?
No, without explicit client consent. III(E) Confidentiality. Even within same firm, info-sharing requires client awareness/consent.

Practice questions

Click each question to reveal the answer and explanation.

Q 1
Standard III governs:
  1. (a)Markets
  2. (b)Duties to clients
  3. (c)Investment analysis
  4. (d)Conflicts
Correct: (b) Duties to clients
Standard III: 5 sub-standards covering duties to clients (loyalty, fair dealing, suitability, performance, confidentiality).
Q 2
III(A) Loyalty includes:
  1. (a)Maximize own fees
  2. (b)Act in client interest above own
  3. (c)Avoid all clients
  4. (d)Charge maximum
Correct: (b) Act in client interest above own
III(A): act in client interest above own. Fiduciary-style duty. Document decisions; manage conflicts.
Q 3
III(C) Suitability for retiree:
  1. (a)Recommend whatever client wants
  2. (b)Match recommendations to risk profile, goals, constraints
  3. (c)High-commission products
  4. (d)Standard products
Correct: (b) Match recommendations to risk profile, goals, constraints
III(C): match recommendations to client's specific circumstances. For income-dependent retiree: low-volatility, income-generating products.
Q 4
III(D) Performance presentation:
  1. (a)Use any time period
  2. (b)Use TWR, show benchmarks, disclose net of fees
  3. (c)Inflate returns slightly
  4. (d)Optional accuracy
Correct: (b) Use TWR, show benchmarks, disclose net of fees
III(D): Use TWR; show benchmark; disclose net of fees; show 10+ years if available; don't cherry-pick. GIPS Standards apply.
Q 5
III(E) Confidentiality:
  1. (a)Optional
  2. (b)Required; client info not shared without consent
  3. (c)Only for HNW
  4. (d)Verbal sharing OK
Correct: (b) Required; client info not shared without consent
III(E): client information not shared without consent. Survives relationship. Strict standard.
Educational purposes only. The numbers, returns, and examples used in this lesson are illustrative. Past performance does not guarantee future results. Mutual fund and securities investments are subject to market risks. This lesson is not investment advice; for advice tailored to your circumstances, consult a SEBI-registered Investment Adviser. Read our full disclaimer.