Knowledge Check QQs

Question 1

Q1 (Section 1): Your actions could subject you to fiduciary accountability, even if you are unaware. True or False?

Answer 1

A1: True. Explanation: Performing fiduciary functions (e.g., giving personalized advice for compensation) can confer fiduciary status under law. Intent is irrelevant if you act as a fiduciary.

Question 2

Q2 (Section 1): The duty of ___ requires acting with skill, prudence, and diligence of a prudent person.

Answer 2

A2: Care. Explanation: The duty of care means using the skill and diligence of a prudent professional in similar circumstances.

Question 3

Q3 (Section 1): Which typically represents the highest standard of conduct for an advisor? (A) Employer standards (B) Legal standards (C) Professional organization standards

Answer 3

A3: (C) Professional organization standards. Explanation: These codes (e.g., fi360, CFP) often exceed minimal legal requirements, imposing stricter ethical rules.

Question 4

Q4 (Section 1): Which on its own triggers fiduciary status? (A) Selling a security (B) Commission on a sale (C) Authority to name another fiduciary (D) Referring a client

Answer 4

A4: (C) Authority to name another fiduciary. Explanation: Even without explicit naming, having power to appoint another fiduciary generally confers fiduciary status.

Question 5

Q5 (Section 1): Which documents are ‘governing’? (Service agreements, Marketing brochures, IPS, Trust docs, Presentations)

Answer 5

A5: Service agreements, IPS, and trust documents. Explanation: They define fiduciary obligations and roles, unlike brochures or general presentations.

Question 6

Q6 (Section 1): Whose roles should be documented in the fiduciary process?

Answer 6

A6: Everyone involved (fiduciary or not). Explanation: Documenting each role prevents confusion and ensures accountability.

Question 7

Q7 (Section 1): Why have formal bylaws for an investment committee? (A) Reduce workload (B) Make decisions w/o client (C) Provide clear governance (D) Limit fiduciary duty)

Answer 7

A7: (C) Provide clear governance. Explanation: Bylaws ensure consistent procedures, recordkeeping, and decision-making, supporting best practices.

Question 8

Q8 (Section 1): Which method best avoids conflicts of interest? (A) Waiver (B) Structural separation (C) Fine-print (D) Ignoring immaterial conflicts)

Answer 8

A8: (B) Structural separation. Explanation: Disclosures are critical, but fully separating conflicting roles most effectively prevents self-dealing.

Question 9

Q9 (Section 1): Which scenario reflects properly managed 12b-1 conflict under ERISA? (A) Exclusive referral, no compensation (B) Retain fees undisclosed (C) Rebate fees (D) Disclose relationship only)

Answer 9

A9: (C) Rebate fees. Explanation: Rebating 12b-1 fees back to the plan keeps compensation level, avoiding an undue conflict of interest.

Question 10

Q10 (Section 1): How often should service agreements be reviewed unless circumstances say otherwise? (A) 5 yrs (B) 10 yrs (C) 1 yr (D) 3 yrs)

Answer 10

A10: (D) 3 years. Explanation: Reviewing every three years is a common fiduciary best practice to ensure services/fees remain reasonable.

Question 11

Q11 (Section 1): An advisor has a tiered fee for equities vs. bonds. Which aligns with the duty of care? (A) Seek client approval each time (B) Objective modeling (C) Disclose orally (D) Switch to level fee next year)

Answer 11

A11: (B) Objective asset allocation modeling. Explanation: This demonstrates skill and prudence, ensuring recommendations are not driven by the advisor’s compensation structure.

Question 12

Q12 (Section 1): What’s the best first step to manage cybersecurity risk? (A) Installing firewalls (B) Respond post-breach (C) Identify assets at risk (D) Staff training)

Answer 12

A12: (C) Identify assets at risk. Explanation: Per the NIST framework, ‘Identify’ is the initial phase before implementing protections.

Question 13

Q13 (Section 2): Which factor is foundational when developing the asset allocation strategy?

Answer 13

A13: Time horizon. Explanation: It drives how aggressively or conservatively assets should be allocated, influencing overall risk tolerance.

Question 14

Q14 (Section 2): During market volatility, what typically happens to correlations among asset classes?

Answer 14

A14: They often rise. Explanation: In stressed markets, uncorrelated assets can start moving in tandem, reducing diversification benefits.

Question 15

Q15 (Section 2): True/False: Short-term disbursement obligations have minimal effect on asset allocation?

Answer 15

A15: False. Explanation: Near-term liquidity needs significantly constrain risk-taking capacity, often requiring more stable, liquid allocations.

Question 16

Q16 (Section 2): Once risk tolerance is established, how is the portfolio modeled?

Answer 16

A16: Typically to maximize return at that risk level. Explanation: Using Modern Portfolio Theory, we aim for the efficient frontier given the client’s risk tolerance.

Question 17

Q17 (Section 2): Projected returns for each asset class should be based on what?

Answer 17

A17: Reasonable forward-looking assumptions. Explanation: Simply relying on historical data can be misleading if economic conditions differ going forward.

Question 18

Q18 (Section 2): Are projected returns equally crucial for foundations/endowments?

Answer 18

A18: Yes. Explanation: They must maintain spending without depleting principal, so accurate return forecasts are vital for long-term sustainability.

Question 19

Q19 (Section 2): When is it appropriate to add non-traditional or alternative asset classes?

Answer 19

A19: When they add diversification or return benefits and can be effectively monitored. Explanation: The fiduciary must have resources to conduct due diligence, handle liquidity constraints, etc.

Question 20

Q20 (Section 2): What is the appropriate level of detail in an IPS?

Answer 20

A20: Enough so a competent third party could implement it without confusion, but not so exhaustive it constantly needs revision. Explanation: Aim for clarity and flexibility.

Question 21

Q21 (Section 2): When is ESG investing required?

Answer 21

A21: If governing documents or mission statements mandate it, and it doesn’t conflict with fiduciary duties. Explanation: A foundation charter may direct certain socially responsible screens, for example.

Question 22

Q22 (Section 2): True or False: ESG in an ERISA plan is allowed if it aligns with fiduciary duties.

Answer 22

A22: True. Explanation: DOL guidance permits ESG as long as it doesn’t sacrifice economic interests or violate the prudent expert standard.

Question 23

Q23 (Section 2): Which decision usually has the largest impact on long-term portfolio performance?

Answer 23

A23: Asset allocation. Explanation: Academic studies show it drives most of the variance in returns, overshadowing security selection or market timing.

Question 24

Q24 (Section 2): For a DB plan, what determines the investment time horizon?

Answer 24

A24: The duration of liabilities (when benefits must be paid). Explanation: DB plans match investments to liability timing, factoring in plan demographics.

Question 25

Q25 (Section 2): If projected returns are too high and not met, what's the main risk?

Answer 25

A25: Underfunding objectives. Explanation: Overly optimistic assumptions create shortfalls, jeopardizing plan solvency or personal goals.

Question 26

Q26 (Section 2): In a participant-directed plan, what must be provided regarding asset classes?

Answer 26

A26: Enough variety for participants to diversify properly. Explanation: Usually at least three core options with different risk/return profiles.

Question 27

Q27 (Section 2): What key element should the IPS include about monitoring?

Answer 27

A27: Defined criteria and frequency for reviews. Explanation: Stating how often to compare performance, what benchmarks to use, and potential watch-list triggers is essential.

Question 28

Q28 (Section 3): First step in selecting service providers?

Answer 28

A28: Identify needed services (recordkeeping, advisory, custody, etc.). Explanation: You must know your requirements before issuing an RFP or comparing providers.

Question 29

Q29 (Section 3): Why is documentation critical in due diligence?

Answer 29

A29: It demonstrates prudence and a consistent method. Explanation: Detailed records (meeting minutes, RFP comparisons) help defend the fiduciary process if ever challenged.

Question 30

Q30 (Section 3): When might unregulated investments be appropriate?

Answer 30

A30: If no comparable regulated product meets the need and the fiduciary can perform thorough due diligence. Explanation: Alternatives like hedge funds require heightened scrutiny for illiquidity, complexity, etc.

Question 31

Q31 (Section 3): How do statutory or regulatory safe harbors benefit fiduciaries?

Answer 31

A31: They reduce liability if the fiduciary meets all the safe harbor requirements. Explanation: E.g., 404(c) protects plan sponsors from participant-directed investment losses, QDIA covers defaults, etc.

Question 32

Q32 (Section 3): Prudent approach to evaluating active vs. passive or ESG vs. non-ESG funds?

Answer 32

A32: Apply consistent due diligence criteria (risk, return, fees, manager stability) for all. Explanation: Don’t let hype or biases replace methodical screening.

Question 33

Q33 (Section 4): Underperforming a market index always necessitates changes. True or False?

Answer 33

A33: False. Explanation: You must consider context—investment style, time horizon, risk metrics, and the IPS goals. A short-term underperformance may not justify replacement.

Question 34

Q34 (Section 4): Minimum recommended frequency for preparing performance reports?

Answer 34

A34: Quarterly. Explanation: While special circumstances might require more frequent checks, quarterly is the common fiduciary standard.

Question 35

Q35 (Section 4): Which qualitative factors should be monitored for an investment manager?

Answer 35

A35: Staff turnover, regulatory issues, service quality, responsiveness, etc. Explanation: Qualitative stability can significantly impact performance and reliability.

Question 36

Q36 (Section 4): When negative news arises about a service provider, the fiduciary must do what?

Answer 36

A36: Investigate thoroughly, assess potential impact, document the decision (retain or replace). Explanation: Ignoring it or acting rashly without due diligence can be imprudent.

Question 37

Q37 (Section 4): A brokerage transaction generating soft dollars is always imprudent. True or False?

Answer 37

A37: False. Explanation: Soft dollars can be acceptable if used for research/brokerage services benefiting the client and monitored for reasonableness.

Question 38

Q38 (Section 4): Outsourcing proxy voting to a third party is a fiduciary breach. True or False?

Answer 38

A38: False. Explanation: Delegation is permissible if done prudently and supervised. Fiduciaries still maintain oversight responsibility.

Question 39

Q39 (Section 4): Which expense is typically not in a mutual fund’s expense ratio?

Answer 39

A39: Brokerage commissions. Explanation: The stated expense ratio covers management fees, 12b-1, admin fees, but excludes trading costs like commissions and spreads.

Question 40

Q40 (Section 4): True/False: The more products are bundled, the more layers of fees likely exist.

Answer 40

A40: True. Explanation: Bundling can obscure individual cost components, requiring extra vigilance to ensure fees are still reasonable.

Question 41

Q41 (Section 4): What is a Level 1 fiduciary assessment?

Answer 41

A41: A gap analysis. Explanation: You compare current processes vs. best-practice standards, identifying deficiencies that need remediation.

Question 42

Q42 (Section 4): Which document is critical for carrying out a fiduciary process?

Answer 42

A42: The Investment Policy Statement (IPS). Explanation: It specifies objectives, asset allocation, monitoring, and roles. Courts often check whether actual behavior aligns with the IPS.