Professionalism and communication - Client communication rec...

Learning Outcomes

This article explains how to meet CFA-aligned expectations for client communication record retention and disclosures in a professional investment setting. It clarifies what constitutes adequate and appropriate documentation of investment-related communications, including recommendations, risk explanations, fee and conflict disclosures, client instructions, and performance reporting. The article explains typical regulatory and CFA Institute requirements for minimum record retention periods, highlighting how to respond when laws, regulations, and firm policies differ. It distinguishes between written, electronic, and verbal communications, emphasizing when and how verbal discussions must be summarized in durable form for the client file. The article also details best practices for organizing, securing, and archiving client communications so records remain complete, retrievable, and tamper-resistant throughout the retention period. In addition, it analyzes the legal, regulatory, and professional risks that arise from incomplete, inaccurate, or missing records, including their impact on suitability assessments and regulatory audits. Finally, the article applies these principles to exam-style scenarios, helping you recognize compliant and non-compliant recordkeeping behavior in CFA Level 2 multiple‑choice questions.

CFA Level 2 Syllabus

For the CFA Level 2 exam, you are expected to understand the standards for professionalism in client communication, particularly regarding documentation and disclosures, with a focus on the following syllabus points:

• Understanding what constitutes adequate and appropriate client communication records
• Explaining minimum record retention periods and documentation practices
• Describing when and how disclosures should be made to clients
• Recognizing risks and regulatory consequences of inadequate record retention

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is considered an essential component of client communication recordkeeping?

   a) Oral advice given to a client
   1. Non-investment-related correspondence
   2. Written recommendations and confirmations of advice
   3. Personal opinions unrelated to investment matters

2. What is the general minimum time period for retaining client communication records as required by most regulatory authorities?

3. A portfolio manager shares summary investment advice with a client via email, but deletes the message without archiving it. What are the potential consequences under the CFA Standards?

4. True or false? An adviser must disclose material changes in portfolio strategy to clients in writing and retain this disclosure as part of the client record.

Introduction

High standards in professionalism and communication form the core of ethical investment practice. For CFA candidates, ensuring proper retention and disclosure of client communications is critical: well-structured records protect both clients and advisers by providing evidence of suitability, diligence, and prudent care. Regulations and ethical standards mandate that all significant client interactions and recommendations are documented, retained for a specified period, and fully disclosed when required. Understanding the requirements for record retention helps mitigate legal risks and ensures exam success.

Client Communication: Documentation and Record Retention

Professional standards require that the substance of all investment-related client communications—whether recommendations, advice, performance reports, or updates—is documented and securely retained. Records provide a verifiable trail should disputes arise, facilitate quality reviews, and demonstrate compliance.

Key Term: Client communication record
A written or electronic record that documents investment-related advice, disclosures, and interactions with a client or prospective client.

Key Term: Record retention period
The minimum time frame mandated by law, regulation, or firm policy during which client communication records must be securely kept and accessible.

What Constitutes Adequate Documentation

Adequate documentation refers to records that clearly show what advice was given, when, and by whom. This includes:

• Investment recommendations and rationale
• Disclosures of fees, conflicts, and risks
• Material updates on portfolio strategies or investment processes
• Instructions or requests from clients
• Confirmations, account statements, and periodic reports

Notes of oral advice or meetings, when investment related, should also be summarized in writing and included in the client file.

Key Term: Disclosure
The act of providing a client with all required information regarding conflicts, fees, risks, or changes in investment strategy, in a format and at a time that allows informed decision-making.

Record Retention Standards

CFA Institute and most regulators require that client communication records are kept for a minimum specified duration—commonly at least 7 years—unless laws prescribe longer periods. If no regulation exists, CFA Standards require that records be kept long enough to demonstrate prudent care and allow for future client queries or regulatory audits.

Electronic communications (such as emails or secure messages) must be archived along with physical documents. Destruction of records before the end of the retention period is generally prohibited.

Disclosures in Client Communication

Advisers must provide clear, timely, and complete disclosures for all material information affecting a client’s investments. This includes:

• Fees and compensation arrangements
• Conflicts of interest
• Risks associated with recommendations or portfolio changes
• Material updates to investment processes or mandate

All disclosures must be appropriately documented and retained.

Regulatory Risks and Consequences

Failure to maintain adequate records can have severe consequences:

• Breach of legal, regulatory, and CFA Standards
• Inability to prove suitability or proper advice
• Loss of client or regulatory trust
• Fines, penalties, or suspension of license

Key Term: Regulatory audit
An official review conducted by a regulatory authority to ensure that client records and disclosures meet required standards.

Best Practices for Recordkeeping

• Retain all relevant communication with clients for at least the minimum retention period
• Use centralized, secure electronic systems whenever possible
• Summarize and document any oral advice or meetings
• Archive all disclosures and confirm client receipt where applicable
• Implement written policies on recordkeeping and compliance reviews

Worked Example 1.1

Scenario:
Sarah, a CFA charterholder, provides a written investment recommendation to a client, including a disclosure of all relevant risks. Six years later, her firm is audited and the client questions the advice. Sarah’s records are only five years old due to a system change.

Answer:
Sarah’s records do not meet the standard retention period. She may be unable to prove her advice and disclosures, risking regulatory penalties and possible disciplinary action under CFA Standards.

Worked Example 1.2

Scenario:
A portfolio manager changes the investment strategy of several client portfolios and verbally informs the clients, but makes no written notification or record.

Answer:
The manager has failed to provide an adequate disclosure and has not documented the communication. This fails both regulatory and CFA Standard requirements, risking disciplinary action and client claims.

Exam Warning

Regulators may prosecute advisers who fail to retain client files for the required period—even if the actual advice was suitable. Lack of records will generally be viewed as a breach, even if no client complaint arises.

Revision Tip

Keep a simple checklist for documenting each client interaction: what was communicated, when, by whom, and how it is retained.

Summary

Maintaining thorough records of client communication, including all advice, instructions, and disclosures, is essential for demonstrating professionalism and compliance for the CFA exam. Records must be securely maintained for at least the required retention period. Written documentation is required for all material client advice and risk disclosures.

Key Point Checklist

This article has covered the following key knowledge points:

• The importance of documenting all significant client communications and advice
• Key record retention periods and suitable storage practices
• Required disclosures to clients regarding advice, risks, and conflicts
• Legal and professional risks of inadequate recordkeeping
• Best practices for compliant and professional client documentation

Key Terms and Concepts

• Client communication record
• Record retention period
• Disclosure
• Regulatory audit