AIF Training || 100% Errorless.
In the event of litigation, factors a judge will consider when making a determination of fiduciary
status include all the following: correct answers 1. Number of implementation options
2. Scope of services
3. Sophistication of client
Define Fiduciary correct answers A fiduciary is someone who: manages property for the benefit
of another; exercises discretionary authority or control over assets; and/or acts in a professional
capacity of trust and renders comprehensive and continuous investment advice. FYI - A
custodian does not perform any of these roles
What are the reasons to revisit service agreements at least every 3 years? correct answers 1.
Vendor's product offering may have expanded
2. Fees may be reduced
3. Scope of require services may have expanded
The is best practice, not an ERISA (fiduciary) requirement
What are the benefits of a CEFEX assessment? correct answers 1. It provides a "checklist"
approach, which imparts a discipline and rigor to an investment decision-making process
2. It may help to educate fiduciaries of their role and responsibilities
3. It leads to the recognition and correction of shortfalls to current investment practices, which
may reduce liability.
Note: it is not designed as a fault-finding exercise
An investment advisor must take discretion of the investment assets in order to provide
comprehensive and continuous investment advice. T or F correct answers False - An investment
advisor need not take discretion in order to provide comprehensive and continuous investment
advice.
Who would normally be considered a fiduciary? correct answers 1. A professional providing
comprehensive and continuous advice
2. Trustee of a private trust
3. Someone with discretion to buy and sell investable assets.
Note: A stock broker/registered representative is not considered a fiduciary
Regulatory Oversight is primarily provided by State Attorney General under which pieces of
legislation correct answers 1. UPIA
2. UPMIFA
3. UMPERSA
Note: Taft-Hartley plans are governed by ERISA, which falls under the oversight responsibility
of the DOL, IRS and PBGC.
Legislation underlying the Practices indicates that U.S. Courts should have access to investment
assets in the event there are egregious violations of fiduciary responsibility. T or F correct
answers True - Practice 1.6 reads, "Clients assets are protected from theft and embezzlement."
,Because all of the Practices are substantiated by legislation, you can infer that the statement is
correct.
A fiduciary or co-fiduciary cannot be held responsible for a breach of their fiduciary
responsibility if they can demonstrate they were not aware of a particular duty or requirement. T
or F correct answers F - Ignorance is not a viable defense.
Expected returns are uncertain. Under the normal distribution curve, approximately 95% of the
expected returns fall within one standard deviation of the mean. T or F. correct answers False -
Under the normal distribution curve, one standard deviation encompasses 66% of the sample and
two standard deviations encompass 95% of the sample. Thus , a portfolio with an expected return
of 8% and standard deviation of 17% could be expected to have a return of less than -9% or more
than 25% in approximately 3 years out of 9.
The most widely used estimate of absolute risk is? correct answers Standard deviation - Alpha
and the Sharpe Ratio are measures of risk-adjusted return. Beta is a measure of market risk.
Standard deviation is the most widely accepted measure of absolute risk.
All of the following are true of the policy portfolio EXCEPT:
1. It relates to asset allocation based upon efficient markets
2. It should always be reflected in the Investment Policy Statement (IPS)
3. Ideally, it is used to model a portfolio that will allow portfolio principal and returns to meet
projected liabilities.
4. It is focused on Alpha correct answers 4. The policy portfolio is contrasted with the pricing
portfolio. The policy portfolio establishes the asset allocation that should be reflected in all
Investment Policy Statements. Ideally, a well crafter policy portfolio is effective in meeting
projected liabilities. The policy portfolio does not address the possibility that managers can
outperform on risk adjusted return bases; therefore, Alpha is not considered in the policy
portfolio. Risk, as measured by Beta, is a focal point of the policy portfolio. Alpha is the focus of
the pricing portfolio.
All of the following are decisive factors to consider when analyzing the number of asset classes
to include in a portfolio EXCEPT:
1. Portfolio size
2. Investment expertise of decision-makers
3. Existing brokerage platform limitations
4. Ability of decision-makers to properly monitor investments correct answers 3. All else being
equal: the larger the portfolio size, the more asset classes that should be available; the greater the
investment expertise of the decision makers, the more asset classes that should be available; and
lastly, the greater the ability to monitor the investments, the more assets classes that should be
available. Brokerage platform should not be a deciding factor on the number of asset classes
because if a particular platform cannot accommodate the required asset classes, it is likely that
another platform could. The fiduciary should assure the platform meets the needs of the
participants, rather than fail to meet the participants' investment needs because of platform
limitations
, The investment policy statement should be specific enough that a ________ could implement the
plan. correct answers The investment policy statement should be specific enough that a
competent third party could implement the plan. In the event the investment advisor is unable to
perform his or her duties, the IPS must be used to replicate the process the investment manager
was following. An investment professional, CPA, or Broker implies that a level of professional
expertise is required, which is not the case.
The best way to rebalance a particular asset class is to: correct answers Resampled efficiency
optimization takes into account uncertainty regarding the accuracy of the input values to the
optimizer: asset class expected returns, risks, and correlations. As a result, the resampled
efficiency approach results in more conservative expected returns for the portfolio as evidenced
by a lower efficient frontier line.
Which of the following is a reason to prepare an investment policy statement:
Select one:
1. Supports the paper trail
2. Provides implementation guidance in estate planning
3. Arguably fulfills the most important function a fiduciary performs
4. All of the above correct answers All of the provided answers are valid reasons for having an
Investment Policy Statement. The IPS supports the paper trail and will provide documentation
for the investment decisions made inside the plan. The IPS will specify the implementation
guidelines for any type of client, including estate planning. The creation of the IPS is probably
the most critical function the fiduciary performs. Without it, the investment strategy could not be
adequately defined and consistently implemented and monitored.
Practice 2.4 (Selected asset classes are consistent with the client's time horizon and risk and
return objectives) does not apply to participant-directed plans. T or F correct answers False
Ordinarily, any restriction on an investment program has the potential to reduce the portfolio's
total return and could cause a breach of investment fiduciary responsibility. However, socially
responsible investing screens are specifically permitted by UPIA when:
Select one:
The fiduciaries are in agreement that SRI considerations are their primary responsibility
The investment is supporting a worthy cause
The plan has included two investments that are not screened for SRI for each SRI option
A donor specifically identifies social screens in their gift correct answers As a rule, any
restriction on an investment program that is expected to reduce the portfolio's total return is
likely a breach of fiduciary responsibility. The UPIA specifically permits the following
exceptions: the trust documents establishing the private trust, foundation, or endowment permit
the use of SRI; a donor directs the use of an SRI strategy; and/or a reasonable person would
deduce from the foundation's/endowment's mission that SRI would be adopted. SRI screens that
are not expected to reduce the returns of a portfolio, or are likely to improve returns, would be
permissible in any type of portfolio
In the event of litigation, factors a judge will consider when making a determination of fiduciary
status include all the following: correct answers 1. Number of implementation options
2. Scope of services
3. Sophistication of client
Define Fiduciary correct answers A fiduciary is someone who: manages property for the benefit
of another; exercises discretionary authority or control over assets; and/or acts in a professional
capacity of trust and renders comprehensive and continuous investment advice. FYI - A
custodian does not perform any of these roles
What are the reasons to revisit service agreements at least every 3 years? correct answers 1.
Vendor's product offering may have expanded
2. Fees may be reduced
3. Scope of require services may have expanded
The is best practice, not an ERISA (fiduciary) requirement
What are the benefits of a CEFEX assessment? correct answers 1. It provides a "checklist"
approach, which imparts a discipline and rigor to an investment decision-making process
2. It may help to educate fiduciaries of their role and responsibilities
3. It leads to the recognition and correction of shortfalls to current investment practices, which
may reduce liability.
Note: it is not designed as a fault-finding exercise
An investment advisor must take discretion of the investment assets in order to provide
comprehensive and continuous investment advice. T or F correct answers False - An investment
advisor need not take discretion in order to provide comprehensive and continuous investment
advice.
Who would normally be considered a fiduciary? correct answers 1. A professional providing
comprehensive and continuous advice
2. Trustee of a private trust
3. Someone with discretion to buy and sell investable assets.
Note: A stock broker/registered representative is not considered a fiduciary
Regulatory Oversight is primarily provided by State Attorney General under which pieces of
legislation correct answers 1. UPIA
2. UPMIFA
3. UMPERSA
Note: Taft-Hartley plans are governed by ERISA, which falls under the oversight responsibility
of the DOL, IRS and PBGC.
Legislation underlying the Practices indicates that U.S. Courts should have access to investment
assets in the event there are egregious violations of fiduciary responsibility. T or F correct
answers True - Practice 1.6 reads, "Clients assets are protected from theft and embezzlement."
,Because all of the Practices are substantiated by legislation, you can infer that the statement is
correct.
A fiduciary or co-fiduciary cannot be held responsible for a breach of their fiduciary
responsibility if they can demonstrate they were not aware of a particular duty or requirement. T
or F correct answers F - Ignorance is not a viable defense.
Expected returns are uncertain. Under the normal distribution curve, approximately 95% of the
expected returns fall within one standard deviation of the mean. T or F. correct answers False -
Under the normal distribution curve, one standard deviation encompasses 66% of the sample and
two standard deviations encompass 95% of the sample. Thus , a portfolio with an expected return
of 8% and standard deviation of 17% could be expected to have a return of less than -9% or more
than 25% in approximately 3 years out of 9.
The most widely used estimate of absolute risk is? correct answers Standard deviation - Alpha
and the Sharpe Ratio are measures of risk-adjusted return. Beta is a measure of market risk.
Standard deviation is the most widely accepted measure of absolute risk.
All of the following are true of the policy portfolio EXCEPT:
1. It relates to asset allocation based upon efficient markets
2. It should always be reflected in the Investment Policy Statement (IPS)
3. Ideally, it is used to model a portfolio that will allow portfolio principal and returns to meet
projected liabilities.
4. It is focused on Alpha correct answers 4. The policy portfolio is contrasted with the pricing
portfolio. The policy portfolio establishes the asset allocation that should be reflected in all
Investment Policy Statements. Ideally, a well crafter policy portfolio is effective in meeting
projected liabilities. The policy portfolio does not address the possibility that managers can
outperform on risk adjusted return bases; therefore, Alpha is not considered in the policy
portfolio. Risk, as measured by Beta, is a focal point of the policy portfolio. Alpha is the focus of
the pricing portfolio.
All of the following are decisive factors to consider when analyzing the number of asset classes
to include in a portfolio EXCEPT:
1. Portfolio size
2. Investment expertise of decision-makers
3. Existing brokerage platform limitations
4. Ability of decision-makers to properly monitor investments correct answers 3. All else being
equal: the larger the portfolio size, the more asset classes that should be available; the greater the
investment expertise of the decision makers, the more asset classes that should be available; and
lastly, the greater the ability to monitor the investments, the more assets classes that should be
available. Brokerage platform should not be a deciding factor on the number of asset classes
because if a particular platform cannot accommodate the required asset classes, it is likely that
another platform could. The fiduciary should assure the platform meets the needs of the
participants, rather than fail to meet the participants' investment needs because of platform
limitations
, The investment policy statement should be specific enough that a ________ could implement the
plan. correct answers The investment policy statement should be specific enough that a
competent third party could implement the plan. In the event the investment advisor is unable to
perform his or her duties, the IPS must be used to replicate the process the investment manager
was following. An investment professional, CPA, or Broker implies that a level of professional
expertise is required, which is not the case.
The best way to rebalance a particular asset class is to: correct answers Resampled efficiency
optimization takes into account uncertainty regarding the accuracy of the input values to the
optimizer: asset class expected returns, risks, and correlations. As a result, the resampled
efficiency approach results in more conservative expected returns for the portfolio as evidenced
by a lower efficient frontier line.
Which of the following is a reason to prepare an investment policy statement:
Select one:
1. Supports the paper trail
2. Provides implementation guidance in estate planning
3. Arguably fulfills the most important function a fiduciary performs
4. All of the above correct answers All of the provided answers are valid reasons for having an
Investment Policy Statement. The IPS supports the paper trail and will provide documentation
for the investment decisions made inside the plan. The IPS will specify the implementation
guidelines for any type of client, including estate planning. The creation of the IPS is probably
the most critical function the fiduciary performs. Without it, the investment strategy could not be
adequately defined and consistently implemented and monitored.
Practice 2.4 (Selected asset classes are consistent with the client's time horizon and risk and
return objectives) does not apply to participant-directed plans. T or F correct answers False
Ordinarily, any restriction on an investment program has the potential to reduce the portfolio's
total return and could cause a breach of investment fiduciary responsibility. However, socially
responsible investing screens are specifically permitted by UPIA when:
Select one:
The fiduciaries are in agreement that SRI considerations are their primary responsibility
The investment is supporting a worthy cause
The plan has included two investments that are not screened for SRI for each SRI option
A donor specifically identifies social screens in their gift correct answers As a rule, any
restriction on an investment program that is expected to reduce the portfolio's total return is
likely a breach of fiduciary responsibility. The UPIA specifically permits the following
exceptions: the trust documents establishing the private trust, foundation, or endowment permit
the use of SRI; a donor directs the use of an SRI strategy; and/or a reasonable person would
deduce from the foundation's/endowment's mission that SRI would be adopted. SRI screens that
are not expected to reduce the returns of a portfolio, or are likely to improve returns, would be
permissible in any type of portfolio
