Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Standard V covers the quality of the work itself: doing enough research to have a reasonable basis for every recommendation, understanding the third-party research, models and external managers you rely on, telling clients clearly how you work, what it costs and what the risks are, and keeping the records that prove all of this. The 2024 revision added an explicit duty to disclose the nature of services and their costs to clients.

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What you will learn

1. Apply Standard V(A) Diligence and Reasonable Basis to the level of research required, the use of third-party research and the selection and monitoring of external managers.

Have a reasonable and adequate basis, supported by appropriate research, for every recommendation and action.
The depth of diligence depends on the product's complexity and risk and the client's situation.
Assess third-party research for sound assumptions, rigour, timeliness and independence before relying on it.
Select and monitor external managers with documented due diligence on process, performance, controls and service providers.
Unusually smooth returns, opaque strategies and affiliated service providers are red flags requiring deeper investigation.

2. Apply Standard V(A) to the use of quantitative models and to group research, including the position of a member who disagrees with a group decision.

Understand a model's assumptions, inputs, sensitivities and limitations before relying on it.
Test models under a wide range of scenarios, including extreme events outside the calibration period.
When a model error is found, correct it promptly and inform affected clients.
A member who disagrees with a group decision need not dissociate if the consensus has a reasonable and adequate basis.
Dissent may be documented; a group process without a reasonable basis should not be endorsed.

3. Apply Standard V(B) Communication with Clients and Prospective Clients, including disclosure of the investment process, of the nature and costs of services, of significant risks and limitations, and the distinction between fact and opinion.

Describe the investment process and promptly disclose changes that could materially affect it.
Since 2024, disclose the nature of the services provided and their costs to the client.
Disclose significant limitations and risks of the investment process.
Include the factors important to a recommendation; brief formats should point to fuller information.
Clearly distinguish facts from opinions such as forecasts and target prices.

4. Apply Standard V(C) Record Retention to the records that must be kept, their ownership, the retention period and the treatment of electronic communications.

Keep records that support investment analyses, recommendations, actions and investment-related communications.
Records may be paper or electronic and include emails, chats, texts and business social media.
Records belong to the firm; a departing member must recreate research at the new firm rather than take it.
Follow local retention rules; absent any, keep records for at least seven years.
Using unapproved channels does not escape the duty; it creates a record-keeping failure.

Module at a glance

V(A): a reasonable and adequate basis for every recommendation; diligence scales with complexity and risk.
Assess third-party research and external managers before relying on them; red flags demand more work.
Understand and stress-test the models you use; fix errors and tell affected clients.
A dissenting team member need not dissociate if the group's view has a reasonable basis.
V(B): explain the process and changes promptly, the nature of services and their costs, the main risks, and label opinions as opinions.
V(C): keep records of analysis and communications on every channel; they belong to the firm; seven years if no rule applies.

This free module has 4 lessons, 14 practice questions with full explanations.

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