A portfolio manager discovers that a proposed investment for a client would significantly benefit a company in which the manager holds a substantial personal stake. How should this conflict of interest be managed according to best practices?

Question: A portfolio manager discovers that a proposed investment for a client would significantly benefit a company in which the manager holds a substantial personal stake. How should this conflict of interest be managed according to best practices?

Answer options:

• Proceed with the investment without disclosure if it's genuinely suitable for the client. ✅ Disclose the conflict to the client and obtain their informed consent before proceeding, or decline the investment.
• Liquidate the personal stake immediately after the client's investment is made.
• Ignore the personal stake as long as the client achieves their investment objectives.

Correct answer: Disclose the conflict to the client and obtain their informed consent before proceeding, or decline the investment.

Explanation: Conflicts of interest must be disclosed to the client. The advisor should also take steps to manage or avoid the conflict, such as obtaining informed consent or declining to act where a perceived or actual conflict exists.