IFC practice question 7 of 35

Pierre wants to discuss the merits of a specific mutual fund with his Dealing Representative, Simone. There are no trailer fees associated with this fund. Simone is familiar with the mutual fund that Pierre is referring to, which is not offered by her dealer. They schedule an appointment to further discuss his investment portfolio. Which behaviour from Simone is ethical?

Answer options

A: Simone's ability to keep her knowledge current on competitors' investment offerings shows that she is putting her client's interest first.

B: Knowing Pierre does not like that her dealer's funds have trailer fees, she chooses not to discuss the relationship between trailer fees and MER while making comparisons.

C: When comparing her dealer's own mutual funds to the one Pierre discovered, Simone emphasizes the importance of similar net rates of return and minimizes the significance of management expense ratios (MERs).

D: While comparing Fund Facts of the different mutual funds, Simone points out that not only are the fund management expenses different but so are the investor profiles for each fund. Correct answer

Correct Answer:

D. While comparing Fund Facts of the different mutual funds, Simone points out that not only are the fund management expenses different but so are the investor profiles for each fund.

Explanation

The most ethical behaviour is to provide a complete, fair, and balanced comparison that serves the client's best interests. By using the Fund Facts documents to compare not only the costs (management expenses) but also the suitability (investor profiles), Simone is acting with integrity. This approach ensures Pierre can make a fully informed decision based on all relevant factors, including risk, objectives, and fees, which aligns with the core ethical duty to put the client's interests first.

Why Incorrect

A. This describes a positive professional attribute (being knowledgeable) but not a specific ethical action taken during the client meeting itself.
B. Intentionally omitting a discussion about trailer fees and their relation to the MER is misleading and unethical as it prevents a fair comparison.
C. Minimizing the significance of MERs is unethical. MERs have a direct and significant impact on an investor's net return and must be clearly explained.

References

1. Canadian Securities Administrators (CSA). (2019). CSA Staff Notice 31-357 Guidance on the Application of NI 31-103 to Distributors of Exchange-Traded Mutual Funds. This notice reinforces the principle that dealers must ensure recommendations are suitable and that all material information, including costs, is disclosed.

2. Canadian Securities Institute. (2023). Investment Funds in Canada (IFC) Textbook. Chapter 1: The Role of the Mutual Fund Sales Representative, Section: "Ethical Conduct". The text emphasizes the duty of care, which includes providing clients with all the information needed to make informed decisions.

3. MFDA (Mutual Fund Dealers Association of Canada). (2018). Rule 2.1.1 "Know-Your-Client" and Suitability. This rule requires members to assess the suitability of any investment for a client, which involves comparing all relevant aspects of different funds, including objectives and costs.

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