Standard III Duties to Clients: Loyalty, Fair Dealing and Suitability Explained

Standard III Duties to Clients is the part of the CFA Code and Standards that tells you how to behave once someone has trusted you with their money. It covers five obligations: loyalty, prudence and care; fair dealing; suitability; performance presentation; and preservation of confidentiality. This guide explains each one in plain language, with short fictional examples you can use to test your own judgement before exam day.

Why Standard III Duties to Clients Matters in the CFA Exam

Ethics questions at every level of the CFA Program keep returning to one idea: the client comes first. Standard III turns that idea into specific, testable rules. If you understand the logic behind each sub-standard, you can answer unfamiliar scenarios without memorising long lists.

If you are new to the overall framework, start with our CFA Level 1 Ethics Code and Standards guide, then come back here for a deeper look at the duties owed to clients.

III(A) Loyalty, Prudence and Care

This standard asks three things of a member or candidate. First, put the client's interests ahead of your employer's and your own. Second, act with the caution and skill that a sensible professional would use when managing someone else's assets. Third, figure out exactly who the client is, because the duty is owed to that person or entity.

Identifying the real client

The "client" is not always the person who signs the paperwork. For a pension plan, the duty runs to the plan's beneficiaries, not to the company executives who hired the manager. For a pooled fund, the duty is to follow the fund's stated mandate, since that is what the investors signed up for.

Example: Ravi Menon manages the retirement plan of Kestrel Textiles. The company's finance head asks Ravi to buy a large block of Kestrel shares to help support the price ahead of a takeover battle. Buying the shares would concentrate risk for the retirees and mainly benefits management. Under III(A), Ravi should decline, because his loyalty belongs to the plan participants.

Proxy voting, soft commissions and best execution

Client assets include the rights attached to them. A manager who has proxy voting authority should vote in the clients' interest and keep a sensible policy for doing so; not every routine vote needs a full cost-benefit study, but important votes deserve attention. Brokerage commissions also belong to the client. Using them to pay for research is acceptable only when the research actually helps the manager serve those clients, and the manager should still seek the best overall execution.

Example: Meera at Lotus Peak Advisors directs client trades to a broker that offers her firm free office software in exchange for order flow. The software does not help with investment decisions. This is a misuse of client brokerage.

III(B) Fair Dealing

Fair dealing means treating all clients fairly when you share investment recommendations or change existing ones, and when you take investment action. Note the word fairly, not equally. A firm may offer premium service levels for higher fees, as long as those levels are disclosed and available to anyone willing to pay for them. What a firm cannot do is quietly favour some clients at the expense of others.

Disseminating recommendations

When an analyst changes a rating, the change should reach all relevant clients at roughly the same time through the firm's normal channels. Telling a few favoured clients first gives them an unfair head start.

Example: An analyst at Harbourline Securities downgrades a cement stock. Before the report is released, she phones two large clients so they can sell early. This violates III(B), even though the report itself is accurate.

Allocating trades, including IPOs

Oversubscribed new issues and block trades should be allocated by a pre-set, fair method, usually pro rata among clients for whom the trade is suitable. Family accounts that pay normal fees should be treated like any other client account, neither favoured nor excluded. Firms should have written allocation procedures and follow them.

III(C) Suitability

Suitability is about matching investments to the client. In an advisory relationship, you should gather information about the client's objectives, risk tolerance and constraints before making recommendations, put that into a written investment policy statement, review it regularly, and judge each recommendation in the context of the client's whole portfolio.

The investment policy statement

A good IPS records the client's return objective, willingness and ability to take risk, liquidity needs, time horizon, tax position, legal or regulatory issues, and any unique circumstances. It should be updated when life changes, for example after a marriage, a job loss or a large inheritance, and at least once a year in normal circumstances.

Unsolicited trades and fund mandates

If a client asks for a trade that does not fit their profile, the adviser should explain the mismatch before executing it. If the trade is minor, a discussion is usually enough. If it would materially change the portfolio's risk, the adviser may need to update the IPS with the client, or the client could open a separate self-directed account.

For a fund manager, suitability means staying within the fund's stated strategy. A "large-cap value" fund that drifts into speculative small-cap technology shares breaches III(C) even if returns look good.

Example: Arjun, a 62-year-old client of Banyan Wealth, wants to move 40 percent of his retirement savings into a single crypto token he read about online. His adviser, Sana, explains how this would change his risk profile and documents the conversation. When Arjun insists, she suggests a small separate account rather than reshaping the entire portfolio.

III(D) Performance Presentation

When you communicate investment performance, it must be fair, accurate and complete. That rules out cherry-picking the best accounts, showing simulated results as if they were real, or claiming a long track record that actually belongs to a previous employer without proper disclosure.

Example: A newly launched firm, Saffron Capital, advertises "18% average annual returns" based only on its two best-performing accounts. Unless the presentation clearly explains this and includes all relevant accounts, it misleads prospects.

Good practice is to state whether returns are before or after fees, disclose when results are hypothetical, and include terminated accounts where they belong. Firms that want a recognised, standardised approach can adopt the Global Investment Performance Standards. Our guide on GIPS explained for CFA candidates covers how that works.

III(E) Preservation of Confidentiality

Information about current, former and prospective clients must be kept confidential. The exceptions are narrow: the information concerns illegal activities by the client, the law requires disclosure, or the client permits it. Sharing confidential information with a professional conduct investigation run by CFA Institute is not a breach.

Example: At a dinner party, Kabir mentions that a well-known film producer he advises is close to bankruptcy. Even though Kabir no longer manages that account, the duty continues after the relationship ends. This violates III(E).

Quick Comparison of the Five Standard III Duties

Sub-standard	Core question to ask	Common trap
III(A) Loyalty, Prudence and Care	Whose interest am I serving?	Following the employer or plan sponsor instead of beneficiaries
III(B) Fair Dealing	Is any client getting an unfair advantage?	Thinking "fair" must mean "identical service"
III(C) Suitability	Does this fit the client's profile or the fund's mandate?	Judging a single holding instead of the whole portfolio
III(D) Performance Presentation	Would a prospect be misled?	Showing only the best accounts
III(E) Confidentiality	Do I have permission or a legal reason to disclose?	Forgetting the duty covers former clients

How Standard III Duties to Clients Appear at Level 1 and Level 2

At Level I, questions are usually short. You read a paragraph and decide whether a specific action complies, or which standard it breaks. The challenge is precision: knowing that fair dealing does not require equal treatment, or that suitability looks at the total portfolio.

At Level II, the same rules sit inside longer vignettes. A single case might involve a trade allocation problem, a proxy voting decision and a confidential conversation all at once. You need to separate each action and test it against the right standard. Our article on how to crack CFA Level 2 ethics case questions walks through that process step by step.

The best preparation is volume. Working through a set of realistic questions in the CFA Level 1 ethics practice course builds the quick recognition you need, while the CFA Level 2 ethics case-based course trains you to untangle multi-issue scenarios.

Frequently Asked Questions

Does fair dealing mean every client must get the same service?

No. Firms can offer different service levels, such as more frequent reviews for a higher fee, as long as the options are disclosed and available to all clients who choose them. What is not allowed is favouring some clients in a way that harms others, such as giving early access to rating changes.

Who is the client when managing a company pension plan?

The duty of loyalty is owed to the plan's participants and beneficiaries. The company that hires the manager is not the ultimate client, so its preferences cannot override the beneficiaries' interests.

What should an adviser do if a client requests an unsuitable trade?

Explain why the trade does not fit the client's profile and record the discussion. For small trades this may be enough. For trades that would materially change the portfolio, the adviser should consider updating the IPS with the client or suggesting a separate, client-directed account.

Can I share client details with a CFA Institute professional conduct inquiry?

Yes. Cooperating with a professional conduct investigation is not a breach of confidentiality. Disclosure is also allowed when the law requires it, when the client agrees, or when the information concerns illegal activity by the client.

Ready to test yourself on Standard III duties to clients? Try the free demo mock test, first chapter test and first chapter notes in our CFA Level 1 Ethics course or the CFA Level 2 Ethics course, and explore the full CFA Exam Series to plan your next step.