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CFA® Level II · Ethical and Professional Standards · free lesson
Guidance for Standard V: Investment Analysis, Recommendations, and Actions
Standard V governs the core of investment work: the diligence behind each recommendation, what clients are told about the process, its risks and its costs, and the records that prove the work was done. Level II vignettes increasingly involve third-party data, quantitative and AI models, and the 2024 requirement to disclose services and costs. This module explains how to judge whether research has a reasonable basis, what must be communicated and how, how long records must be kept, and which procedures keep a research process compliant.
What you will learn
1. Judge whether research and recommendations rest on diligence and a reasonable and adequate basis, including when using third-party or quantitative research.
- Diligence must match the role and the complexity of the investment; outcomes do not prove or disprove diligence.
- Rely on third-party research only after checking assumptions, rigour, timeliness and independence.
- Understand the assumptions and limits of quantitative and AI models and test them, including in extreme conditions.
- Due diligence on external managers covers process, people, controls and operations, not just returns.
- Disagreeing with a group decision does not require dissociation if the decision has a reasonable basis.
2. Determine what must be communicated to clients about the investment process, risks, and the distinction between fact and opinion.
- Disclose the basic investment process and promptly disclose material changes to it.
- Disclose significant risks and limitations, including model limitations and known errors.
- Include the factors important to a recommendation in communications.
- Present forecasts, targets and estimates as opinions, not facts.
- Since 2024, also disclose the nature of services and the costs to the client.
3. Apply the record-retention requirement to research and recommendations.
- Keep records that support every analysis, recommendation, action and investment communication.
- Records include electronic material: models, emails, chats, text messages and social media posts.
- Records belong to the firm; departing members must not take them and must recreate support at a new firm.
- Follow local retention rules; absent any, keep records for at least seven years.
- The duty applies to the individual even when the firm's system is weak.
4. Recommend procedures that help prevent violations of Standard V.
- Written research standards and review procedures set the expected level of diligence.
- Third-party research needs criteria and approved provider lists; models need documented, independent validation and change control.
- Standard disclosures of process, risks, services and costs, with prompt notice of material changes.
- Compliance review of communications and training on labelling opinions.
- A records policy with retention periods, approved archived channels and departure controls.
Module at a glance
- Diligence must match the role and complexity; a reasonable basis is judged by process, not outcome.
- Check third-party research for assumptions, rigour, timeliness and independence before relying on it.
- Understand and test quantitative and AI models, including their limitations in extreme conditions.
- Disclose the investment process, material changes, significant risks and limitations, and since 2024 the services and their costs.
- Present forecasts and targets as opinions, never as facts.
- Keep records supporting every recommendation in any medium; they belong to the firm.
- Absent regulation, keep records for at least seven years; recreate them at a new firm rather than taking them.
This free module has 4 lessons, 15 practice questions with full explanations.