CMFAS RES 1A Ethics, Codes & Standards of Professional Conduct question: stable income for a fixed future expense

CMFAS RES 1AEthics, Codes & Standards of Professional Conduct

A client with a well-paid job tells his adviser he is risk-averse and wants stable income for a fixed future expense. The adviser recommends high-risk products because the client's salary can absorb losses. Which statement is correct?

A Suitable, provided the client is classified as an accredited investor and has opted in to that status
B Suitable, provided the adviser documents the client's income and the reasons for the recommendation
C Suitable, because a high income gives the client the capacity to absorb losses, which then sets his risk profile
D Unsuitable, because his stated objectives and risk appetite govern, and a high income does not override them

Show the answer and explanation

Answer: D. Unsuitable, because his stated objectives and risk appetite govern, and a high income does not override them

Section 4.4.1.3(iii) example (Lauren and Thomas): the adviser must prioritise the client's financial objectives and risk appetite; a high income does not justify a riskier recommendation. FAA section 36 and FAA-N16 require a reasonable basis. The guide adds that a more conservative profile may be assigned notwithstanding investor classification. Takeaway: objectives govern, income does not.

Common mistake

The recall notes flag this scenario; high income is the distractor.

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Original study material mapped to the public CMFAS RES 1A syllabus. Unofficial, not endorsed by MAS or IBF. Verify figures and rules against current guidance before relying on them.