Free CFA Level III: Private Wealth Private Wealth Management Industry Practice Questions

C is correct. AUM stands for Assets Under Management, which represents the total market value of financial assets that a wealth management firm or advisor manages on behalf of clients. AUM is a key metric in the wealth management industry because: (1) it directly determines revenue for firms charging AUM-based fees; (2) it serves as a measure of firm size and market presence; and (3) it influences regulatory registration thresholds (e.g., the 100 million threshold for SEC registration).

A is incorrect. "Annual Underwriting Margin" is not a standard financial industry term and does not describe AUM.

B is incorrect. "Adjusted Unrealized Markup" is not a standard financial industry term. AUM specifically refers to the total assets managed by the firm.

B is correct. A "fee-based" firm receives compensation from multiple sources, including client-paid advisory fees (typically AUM-based) and product-related compensation such as commissions, 12b-1 fees, or revenue sharing arrangements from product manufacturers. This creates potential conflicts of interest that must be disclosed to clients.

A is incorrect. A firm that charges only client-paid fees and receives no product-related compensation is described as "fee-only," not "fee-based." The distinction between fee-only and fee-based is significant from a conflict-of-interest and regulatory perspective.

C is incorrect. Performance-based fees are a specific fee structure that may exist within either fee-only or fee-based models. The term "fee-based" specifically refers to the dual-compensation model, not the method of calculating fees.

A is correct. Dual-registered firms (registered as both an investment advisor and a broker-dealer) face the challenge of operating under two different regulatory frameworks simultaneously. When acting as an advisor, the firm owes a fiduciary duty (best interest standard) under the Investment Advisers Act. When acting as a broker-dealer, the firm is subject to Regulation Best Interest (Reg BI). The firm must clearly disclose to clients which capacity it is acting in for each recommendation, as the standards, compensation structures, and conflict-of-interest obligations differ.

C is incorrect. Firms can and frequently do hold both SEC registration as an investment advisor and FINRA membership as a broker-dealer. This dual registration is common among large wealth management firms.

B is incorrect. There is no prohibition against providing both advisory and brokerage services to the same client. However, the firm must manage the different regulatory requirements and ensure proper disclosure of the capacity in which it is acting.