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CFA® Level III · Ethical and Professional Standards · free lesson
Guidance for Standard V: Investment Analysis, Recommendations, and Actions
Standard V governs the core of investment work: doing the research properly, telling clients what they need to know and keeping the records that prove both. At Level III these duties arise in model-driven strategies, external manager selection, investment committee decisions, AI-assisted research and the everyday letters and messages that portfolio managers send. This module explains each part of Standard V, including the 2024 requirement to disclose services and costs.
What you will learn
1. Evaluate whether a recommendation or investment action rests on diligent, independent research with a reasonable and adequate basis, including when relying on third parties, group decisions and models.
- Diligence, independence and thoroughness are required; the depth of work scales with the decision.
- Third-party research may be used after reasonable checks of assumptions, rigour, timeliness and independence.
- A committee member may sign a report she disagrees with if the process was sound; she should document her dissent.
- Understand, test and control models and AI tools; check outputs rather than trusting them.
- External managers require due diligence before hiring and monitoring afterwards.
2. Determine what must be communicated to clients about services, costs, the investment process, risks and limitations, and distinguish fact from opinion.
- Since 2024, disclose the nature of services and their costs to clients and prospects.
- Disclose the basic process and principles, and promptly disclose material changes.
- Disclose significant risks and limitations, including model limits and material errors.
- Include the factors important to a recommendation, using reasonable judgment.
- Label forecasts and targets as opinions; keep them separate from facts.
3. Apply record-retention requirements that support investment analyses, recommendations, actions and client communications.
- Keep records that support every analysis, recommendation, action and investment-related client communication.
- Records may be paper or electronic; business messages on any channel must be captured.
- Records belong to the employer; a departing member must re-create support at the new firm.
- Follow regulatory retention periods; absent regulation, keep records at least seven years.
- Firms need a written records policy, archiving tools, retrieval tests and controlled destruction.
Module at a glance
- V(A): diligence, independence and thoroughness, with a reasonable and adequate basis scaled to the decision.
- Third-party research and data need reasonable quality checks; models and AI tools need understanding, testing and change control.
- A committee member may stay on a sound group recommendation she disagrees with and document her dissent.
- V(B): disclose services and costs, the process and material changes, risks and limitations; separate fact from opinion.
- Material process changes, such as new models or sub-advisers, must be disclosed promptly.
- V(C): keep records supporting research, actions and client communications, on any channel used for business.
- Records belong to the employer; follow regulatory periods, or keep at least seven years if none applies.
This free module has 3 lessons, 14 practice questions with full explanations.