I was practicing on Schweser and got this wrong
Emily Wells, CFA, receives an unsolicited trade request from a client that Wells believes is unsuitable based on the client’s investment policy statement (IPS). Wells wishes to discuss this request with the client before executing the trade. The focus of Wells’s discussion with the client should most appropriately:
A) be on updating the IPS to reflect a change in the client’s objectives and constraints. B) depend on whether the requested trade has a material impact on the client’s portfolio. C) be on educating the client about the way in which the requested trade deviates from the IPS. I chose A but the correct answer is B. Can someone please explain to me what does it mean by material impact on client’s portfolio? Thank you so much
A Material impact is one which would require a change in IPS or one that would greatly divert from the original strategic asset allocation (SAA). It can also mean material in monetary terms. For example, if the investor’s only investment is in a bond portfolio, requesting an investment in a small cap fund would have a significant impact on the client’s original constraints and objectives. In this case, the portfolio manager (PM) would need to tell the client that the trade is inappropriate. If the client still wants to trade in it, the PM needs to modify the IPS to accommodate this change. If the client refuses to change the IPS, the PM must follow firm procedures. However, in the worst case scenario, this situation may even lead the PM to reconsider the relationship with the client and potentially end the relationship.
For non-material impact to a client’s portfolio, the PM needs to advise the client that this change may not be suitable given objectives and constraints of the mandate. If the client still wants to trade in an unsuitable stock/fund, the PM needs to have written consent from the client that he/she requested to trade in that stock. The PM may also consider opening a separate account where more aggressive strategies may be implemented in order to stick with the original constraints and objectives.
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Thank you so much for the detail explanation