AIF® ACCREDITED INVESTMENT FIDUCIARY | EXAM READY -
VERIFIED QUESTIONS AND ANSWERS - COMPREHENSIVE
LATEST VERSION
Q: What is the core definition of a fiduciary? ANSWER A person or entity that
owes a legal or ethical duty to act in the best interest of another party.
Q: What are the two primary duties of a fiduciary? ANSWER The Duty of Care
and the Duty of Loyalty.
Q: What does the Duty of Care entail? ANSWER Acting with the care, skill,
prudence, and diligence that a reasonably prudent person would use.
Q: What does the Duty of Loyalty entail? ANSWER Putting the client's interests
first, avoiding conflicts of interest, and fully disclosing any unavoidable
conflicts.
Q: What is the "Prudent Man Rule"? ANSWER An 1830 legal standard (Harvard
College v. Amory) stating that fiduciaries should invest with caution and
discretion, evaluating investments individually.
Q: What is the "Prudent Investor Rule"? ANSWER A modern standard (1994
Uniform Prudent Investor Act) stating that all investments must be evaluated
in the context of the total portfolio, emphasizing diversification.
Q: What act governs private trusts in most US states? ANSWER The Uniform
Trust Code (UTC).
Q: What is ERISA? ANSWER The Employee Retirement Income Security Act of
1974, which governs private-sector employee benefit plans.
Q: Under ERISA, who is considered a fiduciary? ANSWER Anyone who
exercises discretionary authority over plan management or assets, or provides
investment advice for compensation.
,Q: What is the "exclusive benefit rule" in ERISA? ANSWER Plan assets must be
used solely for the benefit of participants and beneficiaries.
Q: What is the "prudent expert" standard under ERISA? ANSWER Fiduciaries
must have the knowledge and skill of an expert, or hire one who does.
Q: Does ERISA allow a fiduciary to delegate responsibilities? ANSWER Yes, but
the delegating fiduciary must prudently select and monitor the delegate.
Q: What is the Uniform Prudent Investor Act (UPIA)? ANSWER A 1994 model
law updating the Prudent Man Rule for trusts, focusing on total portfolio risk
and return.
Q: What is the key difference between the Prudent Man Rule and UPIA?
ANSWER UPIA requires evaluating investments in the context of the entire
portfolio rather than in isolation.
Q: What is the Uniform Fiduciaries Access to Trusts Act (UFATA)? ANSWER
Allows a trustee who is also a beneficiary to access trust assets under certain
conditions without violating the Duty of Loyalty.
Q: What is a "kickback" in the fiduciary context? ANSWER Accepting a
payment or benefit from a third party in exchange for directing client business
to them.
Q: Are soft dollars considered a conflict of interest? ANSWER Yes, if not
properly disclosed and managed, as they involve using client brokerage to
acquire research or services that benefit the advisor.
Q: What is "self-dealing"? ANSWER A fiduciary engaging in a transaction that
benefits themselves at the expense of the client.
Q: What is the difference between a fiduciary standard and a suitability
standard? ANSWER Suitability only requires a recommendation to be
"suitable" for the client; fiduciary requires it to be in the client's best interest.
Q: What is a "3(21)" fiduciary under ERISA? ANSWER A fiduciary that provides
investment advice but does not have discretionary control over plan assets.
Q: What is a "3(38)" fiduciary under ERISA? ANSWER An investment manager
who is granted full discretionary control over plan assets and assumes legal
liability for those investment decisions.
, Q: Does a 3(38) fiduciary relieve the plan sponsor of all fiduciary duty?
ANSWER No, the sponsor still has a duty to prudently select and monitor the
3(38) manager.
Q: What is the fiduciary standard applied to Registered Investment Advisors
(RIAs) by the SEC? ANSWER The duty of care and duty of loyalty (full fiduciary
standard).
Q: What is Regulation Best Interest (Reg BI)? ANSWER A SEC rule enhancing
the broker-dealer suitability standard, requiring best interest, care, conflict
disclosure, and compliance, though it is not identical to the full RIA fiduciary
standard.
Q: What is "procedural prudence"? ANSWER The concept that a fiduciary is
judged on the prudence of their process, not just the performance outcome.
Q: Why is procedural prudence important? ANSWER Because even well-
researched investments can lose money; a prudent process protects the
fiduciary from liability if the outcome is poor.
Q: What is "functional fiduciary"? ANSWER An entity that acts like a fiduciary
(e.g., an investment committee) even if not legally defined as one by statute.
Q: What is the "yardstick" by which a fiduciary's actions are measured?
ANSWER The actions of a hypothetical "prudent expert."
Q: Does a fiduciary have a duty to diversify investments? ANSWER Yes, under
both ERISA and UPIA, unless it is clearly not prudent to do so.
Q: What is the consequence of breaching fiduciary duty under ERISA?
ANSWER Personal liability to restore losses to the plan, plus disgorgement of
any profits made.
Q: Can a fiduciary be held liable for the actions of a co-fiduciary? ANSWER Yes,
if they knowingly participate in the breach, conceal it, or fail to use reasonable
care to prevent it.
Q: What is an "exculpation clause"? ANSWER A provision in a trust or plan
document attempting to limit a fiduciary's liability for breaches of duty.
Q: Are exculpation clauses effective under ERISA? ANSWER No, ERISA section
410(a) makes exculpation clauses unenforceable.
VERIFIED QUESTIONS AND ANSWERS - COMPREHENSIVE
LATEST VERSION
Q: What is the core definition of a fiduciary? ANSWER A person or entity that
owes a legal or ethical duty to act in the best interest of another party.
Q: What are the two primary duties of a fiduciary? ANSWER The Duty of Care
and the Duty of Loyalty.
Q: What does the Duty of Care entail? ANSWER Acting with the care, skill,
prudence, and diligence that a reasonably prudent person would use.
Q: What does the Duty of Loyalty entail? ANSWER Putting the client's interests
first, avoiding conflicts of interest, and fully disclosing any unavoidable
conflicts.
Q: What is the "Prudent Man Rule"? ANSWER An 1830 legal standard (Harvard
College v. Amory) stating that fiduciaries should invest with caution and
discretion, evaluating investments individually.
Q: What is the "Prudent Investor Rule"? ANSWER A modern standard (1994
Uniform Prudent Investor Act) stating that all investments must be evaluated
in the context of the total portfolio, emphasizing diversification.
Q: What act governs private trusts in most US states? ANSWER The Uniform
Trust Code (UTC).
Q: What is ERISA? ANSWER The Employee Retirement Income Security Act of
1974, which governs private-sector employee benefit plans.
Q: Under ERISA, who is considered a fiduciary? ANSWER Anyone who
exercises discretionary authority over plan management or assets, or provides
investment advice for compensation.
,Q: What is the "exclusive benefit rule" in ERISA? ANSWER Plan assets must be
used solely for the benefit of participants and beneficiaries.
Q: What is the "prudent expert" standard under ERISA? ANSWER Fiduciaries
must have the knowledge and skill of an expert, or hire one who does.
Q: Does ERISA allow a fiduciary to delegate responsibilities? ANSWER Yes, but
the delegating fiduciary must prudently select and monitor the delegate.
Q: What is the Uniform Prudent Investor Act (UPIA)? ANSWER A 1994 model
law updating the Prudent Man Rule for trusts, focusing on total portfolio risk
and return.
Q: What is the key difference between the Prudent Man Rule and UPIA?
ANSWER UPIA requires evaluating investments in the context of the entire
portfolio rather than in isolation.
Q: What is the Uniform Fiduciaries Access to Trusts Act (UFATA)? ANSWER
Allows a trustee who is also a beneficiary to access trust assets under certain
conditions without violating the Duty of Loyalty.
Q: What is a "kickback" in the fiduciary context? ANSWER Accepting a
payment or benefit from a third party in exchange for directing client business
to them.
Q: Are soft dollars considered a conflict of interest? ANSWER Yes, if not
properly disclosed and managed, as they involve using client brokerage to
acquire research or services that benefit the advisor.
Q: What is "self-dealing"? ANSWER A fiduciary engaging in a transaction that
benefits themselves at the expense of the client.
Q: What is the difference between a fiduciary standard and a suitability
standard? ANSWER Suitability only requires a recommendation to be
"suitable" for the client; fiduciary requires it to be in the client's best interest.
Q: What is a "3(21)" fiduciary under ERISA? ANSWER A fiduciary that provides
investment advice but does not have discretionary control over plan assets.
Q: What is a "3(38)" fiduciary under ERISA? ANSWER An investment manager
who is granted full discretionary control over plan assets and assumes legal
liability for those investment decisions.
, Q: Does a 3(38) fiduciary relieve the plan sponsor of all fiduciary duty?
ANSWER No, the sponsor still has a duty to prudently select and monitor the
3(38) manager.
Q: What is the fiduciary standard applied to Registered Investment Advisors
(RIAs) by the SEC? ANSWER The duty of care and duty of loyalty (full fiduciary
standard).
Q: What is Regulation Best Interest (Reg BI)? ANSWER A SEC rule enhancing
the broker-dealer suitability standard, requiring best interest, care, conflict
disclosure, and compliance, though it is not identical to the full RIA fiduciary
standard.
Q: What is "procedural prudence"? ANSWER The concept that a fiduciary is
judged on the prudence of their process, not just the performance outcome.
Q: Why is procedural prudence important? ANSWER Because even well-
researched investments can lose money; a prudent process protects the
fiduciary from liability if the outcome is poor.
Q: What is "functional fiduciary"? ANSWER An entity that acts like a fiduciary
(e.g., an investment committee) even if not legally defined as one by statute.
Q: What is the "yardstick" by which a fiduciary's actions are measured?
ANSWER The actions of a hypothetical "prudent expert."
Q: Does a fiduciary have a duty to diversify investments? ANSWER Yes, under
both ERISA and UPIA, unless it is clearly not prudent to do so.
Q: What is the consequence of breaching fiduciary duty under ERISA?
ANSWER Personal liability to restore losses to the plan, plus disgorgement of
any profits made.
Q: Can a fiduciary be held liable for the actions of a co-fiduciary? ANSWER Yes,
if they knowingly participate in the breach, conceal it, or fail to use reasonable
care to prevent it.
Q: What is an "exculpation clause"? ANSWER A provision in a trust or plan
document attempting to limit a fiduciary's liability for breaches of duty.
Q: Are exculpation clauses effective under ERISA? ANSWER No, ERISA section
410(a) makes exculpation clauses unenforceable.
