LOS a: Explain and justify a fiduciary’s responsibilities in monitoring an investment portfolio.

Q1. Which of the following choices best describes the reason(s) why a fiduciary must monitor a portfolio?

I. The risk tolerance of the investor may change over time.
II. Economic conditions are likely to change over time.
III. The investor’s liquidity requirements may change over time.
IV. The client portfolio may need to respond to legal or regulatory changes.

A)   I only.

B)   II only.

C)   I, II, III, and IV.

Q2. Darrell Woolaver is the founding principal for Woolaver Capital Management. In his marketing materials, Woolaver makes it a point to tell clients the two primary responsibilities he has as a fiduciary when it comes to portfolio management.
Responsibility 1:    Construct each client’s portfolio so that it offers the maximum return per unit of risk.
Responsibility 2:    Regularly monitor the investor’s portfolio to make sure it continues to meet the client’s needs.
With respect to his statements about the responsibilities Woolaver has as a fiduciary when it comes to portfolio management, Woolaver is:

A)   incorrect with respect to Responsibility 1, and incorrect with respect to Responsibility 2.

B)   correct with respect to Responsibility 1, and correct with respect to Responsibility 2.

C)   incorrect with respect to Responsibility 1, but correct with respect to Responsibility 2.

Q3. Heidi Burke was recently hired by Beekley Capital Advisors as a portfolio manager. On her first day on the job, Cynthia Beekley, owner and founder of the firm, asks Burke to write down the fiduciary responsibilities of a portfolio manager as they pertain to  monitoring a client’s portfolio. Burke writes down the following items and hands the paper to Beekley.

Which of the following most accurately describes Burke’s statements?

A)   Only Items 1, 3, and 4 address Beekley’s question, while Item 2 is a fiduciary duty not related to monitoring.

B)   Only Items 1 and 4 address Beekley’s question, while Items 2 and 5 are a fiduciary duties not related to monitoring.

C)   Only Item 3 addresses Beekley’s question, while Items 1 and 4 would be part of a client’s investment policy statement.

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Q1. Which of the following choices best describes the reason(s) why a fiduciary must monitor a portfolio?

I. The risk tolerance of the investor may change over time.
II. Economic conditions are likely to change over time.
III. The investor’s liquidity requirements may change over time.
IV. The client portfolio may need to respond to legal or regulatory changes.

A)   I only.

B)   II only.

C)   I, II, III, and IV.

Correct answer is C)

The initial construction of an investor’s portfolio is based upon the client’s circumstances and long-term capital market expectations at the time of construction. The reason why a fiduciary must monitor the portfolio is because both of these broad categories are subject to change. Changes in the investor’s circumstances (risk tolerance, liquidity, establishment of a trust, or other factors) or changes in economic conditions or capital market expectations may necessitate changes to the client’s portfolio which should be carried out by the portfolio manager.

Q2. Darrell Woolaver is the founding principal for Woolaver Capital Management. In his marketing materials, Woolaver makes it a point to tell clients the two primary responsibilities he has as a fiduciary when it comes to portfolio management.
Responsibility 1:    Construct each client’s portfolio so that it offers the maximum return per unit of risk.
Responsibility 2:    Regularly monitor the investor’s portfolio to make sure it continues to meet the client’s needs.
With respect to his statements about the responsibilities Woolaver has as a fiduciary when it comes to portfolio management, Woolaver is:

A)   incorrect with respect to Responsibility 1, and incorrect with respect to Responsibility 2.

B)   correct with respect to Responsibility 1, and correct with respect to Responsibility 2.

C)   incorrect with respect to Responsibility 1, but correct with respect to Responsibility 2.

Correct answer is C)

Woolaver is incorrect with respect to Responsibility 1. The portfolio manager has a fiduciary duty to construct the portfolio to meet the needs of the client as specified in the investment policy statement. Although seeking the maximum return per unit of risk is as admirable goal, the client’s goals with respect to risk tolerance, liquidity, legal considerations, or other factors may not be fully considered under Woolaver’s first statement. Responsibility 2 is correct. The portfolio manager has a fiduciary duty to monitor the portfolio to be sure it continues to meet the client’s needs. This means monitoring the client’s circumstances and capital market conditions, and making changes to the portfolio as necessary.

Q3. Heidi Burke was recently hired by Beekley Capital Advisors as a portfolio manager. On her first day on the job, Cynthia Beekley, owner and founder of the firm, asks Burke to write down the fiduciary responsibilities of a portfolio manager as they pertain to  monitoring a client’s portfolio. Burke writes down the following items and hands the paper to Beekley.

Item 1:	Watch for changes in client objectives that may necessitate changes to the portfolio.
Item 2:	Construct the investor’s portfolio to meet the needs of the client as specified in the IPS.
Item 3:	Identify changes in capital market conditions and asset class risks.
Item 4:	Look for changes in client constraints that could cause changes in the client’s allocation.
Item 5:	Avoid trying to make tactical timing changes to a client portfolio because evidence shows that market timing increases risk without increasing return.

Which of the following most accurately describes Burke’s statements?

A)   Only Items 1, 3, and 4 address Beekley’s question, while Item 2 is a fiduciary duty not related to monitoring.

B)   Only Items 1 and 4 address Beekley’s question, while Items 2 and 5 are a fiduciary duties not related to monitoring.

C)   Only Item 3 addresses Beekley’s question, while Items 1 and 4 would be part of a client’s investment policy statement.

Correct answer is A)

Since the portfolio manager is in a position of trust, he has the fiduciary duty to construct the needs of the client as specified in the IPS and the duty to monitor the portfolio to be sure it continues to meet the client needs. The monitoring process includes monitoring a client’s objectives and constraints as well as changes in market conditions. Therefore, Item 2 is a fiduciary duty not related to monitoring, while Items 1, 3, and 4 address fiduciary duties related to monitoring. Item 5 is not necessarily true since a skilled manager could use tactical asset allocation to reduce risk and/or increase returns.