CMFAS RES5 Ethics Foundations question: manifestation of conflict of interest

CMFAS RES5Ethics Foundations

Rather than discuss the options with his client, a representative parks the client's idle funds in a default account paying little or no interest — an arrangement that is profitable for the financial institution but not in the client's best interest. This illustrates which manifestation of conflict of interest?

A Involuntary cross-selling through a 'default option' that profits the institution but not the client
B A proper discharge of the fiduciary duty of obedience, since the client's funds are kept secure
C Churning, since the client's funds are moved into an account that earns the institution fees
D A legitimate exercise of discretion involving no conflict, since idle funds must be placed somewhere

Show the answer and explanation

Answer: A. Involuntary cross-selling through a 'default option' that profits the institution but not the client

The text describes the second way involuntary cross-selling occurs: a representative applies a 'default option' not advantageous to the client, such as placing the client's funds in a low or no interest rate that is profitable for the institution but not in the client's best interest.

Common mistake

Choosing a default that benefits the institution over the client is a conflict of interest, not a proper exercise of discretion or a discharge of the duty of obedience.

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