ETHICS QUESTION - DO YOU KNOW?

[istismar]

When we read this in standard III A:

"A manager who pays a higher commission than he or she would normally pay to purchase the goods or services, without corresponding benefit to the client, violates the duty of loyalty to the client."

Does this apply also when the client is infomed and he is in agreement to this (i.e. he has no objection)?

 

[dret]

I believe that if this is disclosed to the client and they fully understand the terms etc and agree to it.. then you have not violated the standard of duty of loyalty to the client.

I ran into a question like this on the weekend..

 

[bean]

I ran into a similar questions also regarding best execution. The client wanted to use someone other than who could provide the lowest transaction cost but as long as the client is aware of this it is not a violation of the standards.

 

[jmpickel]

dret and bean are mistaken. It is your duty to the client to minimize transaction costs. It is ok to go with higher execution cost if you are getting soft dollar that is worth it (that soft dollar MUST be applicable to your client ie. if the soft dollar is info on china and your client only holds domestic stocks, then it is a violation)

You can not justify paying higher execution costs voluntarily with all else being equal, with or without client permission.

 

[bean]

I'm sorry my friend but you are mistaken...

From CFAI materials:

Example 3: Reading 2 � �Guidance� for Standards I�VII (p. 48)
Broker has an obligation at all times to seek best price and execution on all trades (true, but keep reading). Broker may direct new client trades exclusively through XX Company as long as Broker receives best price and execution on the trades OR receives a written statement from new clients that she is not to seek best price and execution and that they are aware of the consequence for their accounts.

 

[CFAZod]

It does read that. On page 47, the "Recommended Procedures for Compliance" bullet reads:

Seek best execution. Members and candidates must seek best execution for their clients. Best execution refers to the trading process firms apply that seeks to maximize the value of a client's portfolio within the client's stated investment objectives and constraints.

Excluding and "soft dollar" benefit, or some loyalty, the question remains, why would a client choose higher transaction costs? Perhaps the difference between a "friendly" firm charging a bit more than some unknown firm is negligible?

This of course, bean, does not negate your findings in the readings.

 

[jmpickel]

I stand corrected! Good research bean!

 

[jamespucyk]

Jm, did you write last year. You may be right based on the old Ethics handbook if you did.