Ethics Case Study of the Week: Managing Client Assets During a Global Pandemic

By Gary Sarkissian posted 05-30-2022 08:00

CFA Institute’s Code of Ethics and Standards of Professional Conduct outline the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust.  Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.  

As investment professionals, we face important ethical decisions in our day-to-day activities.  Some scenarios we encounter will be straightforward, while others may be more complex.  No matter the circumstances, continuous learning remains imperative in an evolving investment industry and an adapting regulatory environment. 

For that reason, each week we feature a sample case from CFA Institute’s Ethics in Practice Casebook.  Many cases are built upon real-life examples that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation.  At the end of each case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.  

This week’s case involves Standard III(A) Loyalty, Prudence, and Care.

Managing Client Assets During a Global Pandemic
During a severe economic downturn brought on by a global pandemic, major stock indexes and the equities of previously safe, blue chip companies are losing 3%–4% of their value on a daily basis. Schieffer is a discretionary investment adviser for several retired clients in the same social circle. During the market collapse, several of Schieffer’s clients are on an Eco-tour vacation on a cruise ship to South America and Antarctica. Almost 60% of the passengers on the ship have contracted the virus, and the trip has been aborted. But because of fears of contamination, the cruise ship has been denied entry to many ports and is currently headed to the United States. But it will take several weeks for the ship to arrive, and regular communication with passengers is severely disrupted. Although the accounts are discretionary, Schieffer’s practice is to meet with clients in person at least twice a year and whenever their financial picture changes or major swings in the market signal a need to review their investment policy statements. But now, the fast-moving nature of the markets and the clients’ isolation make it impossible to meet with them to discuss how to manage their portfolios. Schieffer should

 A. make no major changes to his clients’ portfolio until they can be consulted.
 B. protect client assets by moving their investments to cash.
 C. contact close family members of his clients to get insight on a permissible course of action.
 D. seek permission from his employer to freeze client accounts until he can consult with them in person in compliance with his usual practice.
 E. none of the above.

Click the “Analysis” button below to see the analysis for this case, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit

This case relates to the duty to protect the interests of the client. CFA Institute Standard of Professional Conduct III(A): Loyalty, Prudence, and Care states that CFA Institute members have a duty of loyalty to their clients and must act for the benefit of their clients using reasonable care and exercising prudent judgement. As a discretionary investment manager, Schieffer has the duty and authority to manage his client accounts in a manner consistent with their best interests. Best practice for an investment adviser is to discuss with the client at the outset of the relationship the investment objectives, goals, constraints, risk tolerance, long-term goals, income and retirement needs, and other financial considerations and draft an investment policy statement (IPS) to reflect these circumstances. Such a document should be updated regularly and with any changes to the clients’ circumstances.

Additionally, at the outset of the client relationship, the adviser should draft a client agreement that explicitly describes the nature of the services provided and the authority of the adviser to manage the accounts. A well-developed, comprehensive IPS and client agreement establishes parameters for the adviser’s actions in a variety of scenarios, including a rapidly deteriorating investment environment. Otherwise, even with discretionary authority, an adviser’s conduct may be constrained by the boundaries established by the IPS.

The market crash caused by the global pandemic is an extraordinary turn of events for Schieffer and his clients. Schieffer may be a tempted to want to protect his clients’ investment accounts in the short term by changing the asset allocation to cash (A). But this would presumably represent a major change to the asset allocation strategy previously agreed on. Some clients’ financial circumstances and needs may drastically change because of the pandemic and they may appreciate this short-term solution. Others may want to stay the course and stick to their long-term objectives and ride out the market crisis. Without either discussing such a drastic change in their portfolio directly or having previously established protocols for what to do in such a scenario, Schieffer must follow the established guidelines of the IPS and not make any changes to the general parameters of his clients’ mandates. Although it is understandable that Schieffer might want to try to get insight into the possible wishes of his clients, his duty to keep client information confidential would prevent him from discussing their accounts with anyone not authorized by the clients, even if they are close family members (C). Freezing client accounts until his customary policy of in-person communication is possible (D) would also not likely benefit his clients because there may be actions Schieffer could take as a discretionary investment manager without direct client communication that could protect their portfolio. Choice A is the best course of action.

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© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice.  This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.