Ethics - Suitability vs Portfolio mandate difference, investment, because, between, manager

sharksfan

What is the difference between the analysis of the suitability of an investment on a portfolio basis and analysis if the investment strategy follows the investment mandate ?

I went through some questions where a portfolio manager will add a risky asset in her risk averse client's portfolio, and this won't be a violation because the suitability has to be analyzed on a portfolio basis.

Other cases where the portfolio manager will make some investments decisions by adding high beta stocks for example, and then violates the duties to clients standard because he didn't respect the investment mandate.

I guess for both the scenario, there is an IPS defined in advance and updated regularly. So what makes the difference between adding a risky strategy in a portfolio and still be correct on a portfolio basis, and doing the same,but be in violation of the mandate or objectives of the client ?

MythosHF

Miss*Yiota Wrote:
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> What is the difference between the analysis of the
> suitability of an investment on a portfolio basis
> and analysis if the investment strategy follows
> the investment mandate ?
>
> I went through some questions where a portfolio
> manager will add a risky asset in her risk averse
> client's portfolio, and this won't be a violation
> because the suitability has to be analyzed on a
> portfolio basis.
>
> Other cases where the portfolio manager will make
> some investments decisions by adding high beta
> stocks for example, and then violates the duties
> to clients standard because he didn't respect the
> investment mandate.
>
> I guess for both the scenario, there is an IPS
> defined in advance and updated regularly. So what
> makes the difference between adding a risky
> strategy in a portfolio and still be correct on a
> portfolio basis, and doing the same,but be in
> violation of the mandate or objectives of the
> client ?


I guess it has to do with what effect the risky asset has on the portfolio. As we know, a risky asset could actually reduce the risk of a portfolio, it may not always be a bad idea to add a risky asset. It depends on what you are trying to achieve and whether that is acceptable according to the IPS. It should not violate the mandate of course say if it is given in the IPS that a stock with a beta greater than 4 is not to be included, it is not to be included.

If the mandate calls for only fixed income securities short securities or a particular rating and if you add high beta stocks to it, that would be a suitability violation.