Chartered Financial Analyst Level 3 test

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CFA Level 3 - Ethical and Professional Standards - Guidance for Standards I–VII

Intermediate

1/5

Andrew, a CFA charterholder, is a portfolio manager at an investment firm. During a meeting with a prospective client, Andrew highlights the strong performance of a mutual fund he manages, noting that it has outperformed its benchmark by 3% annually over the past three years. However, Andrew fails to mention that the fund's expense ratio is significantly higher than its peers, which has contributed to its underperformance on a net-of-fees basis. The client is impressed with the fund's performance and decides to invest a substantial portion of their portfolio in the fund. What should Andrew have done differently to comply with the CFA Institute Standards of Professional Conduct?

Andrew should have provided a balanced presentation of the fund's performance, including disclosing the impact of the higher expense ratio on the fund's net-of-fees returns. He should have also ensured that the client fully understood the characteristics and risks associated with the fund before making an investment decision.

Andrew should have focused solely on the fund's strong gross-of-fees performance and not mentioned the benchmark at all. Doing so would have simplified the discussion and made it easier for the client to appreciate the fund's investment merits, leading to a more successful outcome for both parties.

Andrew's presentation of the fund's performance was appropriate, as he accurately stated the fund's gross-of-fees returns relative to its benchmark. The expense ratio is not a material factor that needs to be disclosed, as long as the fund has outperformed its benchmark.