Scenario: A portfolio manager fails to consider liquidity risk in a client’s portfolio when making recommendations. Which CFA Institute Standard is violated?

• A. Standard V.A Diligence and Reasonable Basis
• B. Standard V.B Communication with Clients and Prospective Clients
• C. Standard IV.C Suitability
• D. Standard IV.E Preservation of Confidentiality

Answer: (A)

Diligence and Reasonable Basis requires that investment analyses, recommendations, and actions be thorough and supported by a sound, well-documented basis. Liquidity risk is a material factor for many investments, affecting how easily a position can be bought or sold without significant price impact and how it aligns with the client’s cash needs. By not considering liquidity risk, the portfolio manager fails to provide a reasonable basis for the recommendation, since an illiquid asset or a liquidity mismatch can materially alter risk and expected performance. This standard focuses on the quality and rigor of the analysis behind every recommendation, including all relevant risks; it's not primarily about how you communicate with clients or about confidentiality.