What is Fiduciary Duty?

B is correct. Jennifer's duty of care requires advice in the client's best interest, and her duty of loyalty bars her from letting Fund B's payment to her firm decide the choice, so she should recommend Fund A, which has lower costs. Cost is one of several factors, and the fiduciary duty does not always require the cheapest product, but here the funds are otherwise alike, so nothing outweighs Fund B's higher cost, which mainly benefits Jennifer's firm.

A violates the duty of loyalty by prioritizing Jennifer's compensation over the client's best interest. C is incorrect because disclosure does not eliminate a conflict, and a disclosed conflict does not relieve Jennifer of the duty to give advice in the client's best interest; she still must recommend the better fund for this client. D fails the fiduciary standard because the investments are not equally suitable due to the cost difference. The adviser must make the best recommendation, not defer to the client when there's a clear better choice.

C is correct. Fiduciary duty consists of two fundamental components: duty of care (providing advice with competence, skill, and diligence) and duty of loyalty (putting the client's interests ahead of the adviser's own interests).

A incorrectly pairs duty of care with confidentiality, which while important, is not one of the two core fiduciary components. B incorrectly identifies duty of disclosure; while disclosure is important, it's a mechanism for addressing conflicts under the duty of loyalty, not a separate component. D incorrectly references suitability (a broker-dealer standard, not the fiduciary standard) and best execution, which is part of an adviser's duty of care where the adviser selects broker-dealers, not a separate component.

C is correct. The duty of care requires advisers to provide advice with competence and diligence, which includes ongoing monitoring and making changes when better options serve the client's best interest. The 0.30% annual savings on a $2 million portfolio equals $6,000 per year, a material benefit to the client. The adviser's workload does not override fiduciary obligations.

A violates the duty of care because "suitable" is the suitability standard, not the fiduciary "best interest" standard (a broker-dealer recommending to a retail customer now also owes a best-interest duty under Regulation Best Interest). The duty of care requires diligent advice in the client's best interest, not maintaining the status quo for the adviser's convenience. B is incorrect because the fiduciary standard requires the adviser to proactively act in the client's best interest without waiting for the client to request it. D is incorrect because the adviser's existing fee already pays for managing the portfolio, and adding a charge for that same work raises an unreasonable-fee concern.

C is correct (the exception). Verbal disclosure alone does not satisfy the state standard. Under the NASAA model rule on unethical business practices, an adviser must disclose any material conflict of interest to clients in writing before any advice is rendered (typically through Form ADV Part 2A), and the disclosure must be full and fair enough for the client to give informed consent.

A is acceptable: Written disclosure in Form ADV Part 2A with client consent is a proper method for managing conflicts. B is acceptable: Eliminating the conflict entirely is the gold standard for satisfying fiduciary duty. D is acceptable: Written disclosure combined with demonstrating the recommendation serves the client's best interest despite the conflict satisfies both the duty of loyalty (disclosure) and duty of care (best interest analysis).

A is correct. Statements 1 and 3 are accurate requirements for managing this conflict of interest.

Statement 1 is true: The adviser must disclose that the fund is proprietary and creates a conflict of interest before making the recommendation; a state-registered adviser must make that disclosure in writing (typically in Form ADV Part 2A) under the NASAA model rule.

Statement 2 is false: The proprietary fund does not need to be superior to all alternatives; it must serve the client's best interest and be appropriate for the client's situation. If it is competitive with other suitable options and appropriate for the client, it can be recommended with proper disclosure.

Statement 3 is true: Under the duty of care, the adviser must demonstrate that despite the conflict (adviser's firm profits from the recommendation), the proprietary fund still serves the client's best interest based on the client's goals, risk tolerance, and circumstances.

Statement 4 is false: The adviser must make full and fair disclosure so the client can give informed consent, but that consent need not be in writing. It can be explicit or, depending on the facts, implicit (for example, when the client enters into or continues the advisory relationship after receiving the disclosure).