Heidi Katz is a CFA candidate and an analyst at a pension consulting firm. Her father is a major shareholder and managing director at Saturn Partners, a large hedge fund. When assisting in an alternative manager search for a pension client, Katz plans to recommend Saturn's market-neutral strategy because she feels it meets all of the pension plan's criteria. Given this situation, the best course of action for Katz is to:

• A. not present this strategy to the client and recommend another strategy.
• B. disclose the potential conflict to the pension client when discussing this recommendation.
• C. disclose the potential conflict to her employer and follow their guidance regarding disclosure of her relationship to the client.
• D. Do not disclose any conflicts.

Answer: (B)

The main idea here is that when a professional has a personal or financial tie to an investment option being recommended, full disclosure to the client is required to preserve objectivity and protect the client's interests.

Heidi’s father’s position at Saturn Partners creates a potential conflict of interest in recommending Saturn’s market-neutral strategy to a pension client. The ethical course is to disclose this potential conflict to the pension client when presenting the recommendation. That disclosure lets the client see any factors that could influence judgment and decide whether to proceed with that option or consider alternatives, maintaining transparency and the fiduciary duty to the client.

While it can also be appropriate to inform her employer and seek guidance, the client-facing disclosure is the essential step. Choosing not to disclose or simply relying on internal guidance without informing the client would fail to meet the obligation to act with candor and could undermine trust and objectivity.