CFA Level 1 · Module 01 Ethical and Professional Standards · Chapter 7
Standard V governs the substance of investment work: how you research, what you tell clients, and what you keep on file. Its three sub-sections track the arc of a recommendation. V(A) requires a sound basis for the analysis, V(B) requires honest and complete communication of that analysis to clients, and V(C) requires records that support what you did. This is where the technical craft of investing meets the ethical duty to do it properly.
Standard V(B) also carries one of the 2023 revisions, a new requirement to disclose the nature of the services you provide and their costs to the client, so this reading is where that change is developed. Because Standard V touches everyday analytical and advisory work, the exam draws on it heavily, often testing whether a recommendation had a reasonable basis and whether communication distinguished fact from opinion.
As throughout the module, MidhaFin teaches the duties in its own words and illustrates them with invented scenarios. No example, firm, or figure below is drawn from the source curriculum or any prep provider.
A recommendation is only as good as the work behind it and the honesty with which it is conveyed. Standard V insists on both. It is not enough to be right by luck, or to communicate a well-founded view carelessly; the Standard asks that the process be sound and that the client understand what they are being told. Read the three sub-sections as a chain: diligent research, clear communication, and a documented trail, each supporting the next.
One framing helps throughout. A reasonable basis is judged by the quality of the process, not by the outcome. A recommendation supported by thorough, independent analysis can still lose money, and that does not make it a violation; a recommendation that happens to profit can still breach V(A) if it rested on no real work. Keep the focus on whether the analysis was adequate at the time it was made.
This process-not-outcome principle runs deeper than it first appears, and it is easy for an exam question to exploit the confusion. Investing is inherently uncertain: even excellent analysis is regularly overtaken by events no one could reasonably foresee, and even careless work sometimes gets lucky. If the Standard graded members on results, it would reward gamblers and punish diligent professionals whose sound judgment happened to be overtaken by chance. So the duty is framed around what a member could reasonably know and do at the time. When a scenario dwells on how badly, or how well, an investment turned out, treat that as a distraction and return to the real question: was the work behind the decision diligent and adequate when it was made?
Members and Candidates must:
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard V(A) requires you to exercise diligence, independence, and thoroughness in analyzing investments and making recommendations or taking actions, and to have a reasonable and adequate basis, supported by appropriate research and investigation, for what you do. What counts as reasonable depends on the situation, the nature of the decision, the resources available, and the complexity of the investment, but the core demand is constant: real analysis must stand behind the recommendation.
Diligence has an independence dimension too. You must reach your own supportable conclusion rather than simply echo a consensus, a promoter, or a favoured narrative. A recommendation adopted because it is popular or convenient, without a basis you could defend, fails the Standard even if it turns out well. The practical test the guidance invites is whether, challenged, you could show the research and reasoning that support your view.
How much research is enough is a question of degree, and the guidance ties it to the circumstances rather than fixing a checklist. A simple, well-understood investment for a routine mandate needs less than a complex, illiquid, or novel instrument, and a recommendation you originate demands more of you than one you adopt from a source you have properly vetted. The level of diligence also rises with the consequences: the more a client relies on the recommendation, and the more is at stake for that client, the more thorough and carefully documented the basis must be. What never changes is that there must be a genuine, defensible foundation behind the view; “reasonable” flexes with the situation, but it never falls all the way to zero. A member who can clearly articulate why the depth of their work matched the importance of the decision has usually met the Standard comfortably.
It also helps to connect V(A) to Standard I(E) Competence from the Professionalism reading. Competence is about having the skill the work requires; diligence is about actually applying it to the specific decision. A member can be perfectly competent and still breach V(A) by cutting corners on a particular recommendation, and, conversely, thorough effort cannot rescue a decision the member lacks the competence to make. The two duties reinforce each other: sound recommendations need both the underlying capability and the applied care, and a shortfall in either one is enough to undermine the result.
Setup. Kabir, an analyst at the fictional Teesta Capital, issues a strong buy on a newly listed company after reading only its promotional investor deck and a single upbeat news article, without examining its financials, competitive position, or the risks disclosed in its filings.
Answer: the recommendation violates Standard V(A). A reasonable basis requires real research and independent analysis, not reliance on promotional material, regardless of how the stock later performs.
An analyst recommends a stock on the strength of a friend’s tip, with no research of his own, and the stock happens to rise sharply. Does the profit mean Standard V(A) is satisfied?
No. V(A) judges the process, not the outcome. A recommendation made with no reasonable or adequate basis violates the Standard even when it happens to make money, just as a well-researched recommendation that loses money does not. A profitable result never cures the absence of diligent, independent analysis.
Modern analysts rarely work in isolation, so the guidance addresses in detail the question of relying on others’ work. Secondary research is research done by someone else within your own firm; third-party research is research from outside the firm. You may rely on either, but only if you have a reasonable basis to believe it is sound. If you have reason to suspect the research or its source is flawed or biased, you may not simply pass it along. For third-party providers, the recommended practice is to perform due diligence on the vendor, assessing the soundness of its methodology and independence, and, once satisfied, you may use its work in good faith.
Group research raises a distinct question: what if a research team issues a recommendation you personally disagree with? The guidance is reassuring: if the report has a reasonable and adequate basis, a member need not decline to be associated with it merely because their own view differs. The collective judgment of a diligent team can be a reasonable basis, and honest disagreement within that process does not require the dissenter to disown the report. What matters is that the process behind the group’s conclusion was sound.
This point often surprises candidates, so it is worth stating plainly: being outvoted is not the same as being wrong, and the Standard does not force a lone dissenter to attach a disclaimer or withhold their name from a soundly reasoned team report. The rationale is that a reasonable basis can be collective; a rigorous process that weighs different views and reaches a defensible conclusion is exactly the kind of foundation V(A) is looking for. The dissenter’s protection ends, however, if the process itself was flawed, if the report rests on inadequate work or ignores obvious problems, then a member who knows this cannot hide behind the group and must not lend their support to a conclusion they know lacks a reasonable basis.
The reliance rules share a common logic. Whether the work comes from a colleague down the hall, an outside vendor, or a committee, you may lean on it only to the extent you have a sound reason to believe it is trustworthy, and you lose that shelter the moment you have reason to doubt it. Good faith is required but not sufficient on its own; it must be good faith grounded in reasonable checking. That is why due diligence on third-party providers is emphasized: it converts a hopeful assumption that the research is sound into a defensible basis for relying on it. A useful way to frame it for the exam is that reliance is never automatic and never forbidden; it is conditional, and the condition is that you have done enough to reasonably trust the source and have seen nothing that should make you doubt it.
| Source | What it is | When you may rely on it |
|---|---|---|
| Secondary research | Work by others within your firm | When you reasonably believe it is sound and have no reason to doubt it |
| Third-party research | Work from outside the firm | After due diligence on the provider’s methodology and independence |
| Group research | A team’s collective recommendation | When the report has a reasonable basis, even if you personally disagree |
Setup. Leela, a manager at the fictional Godavari Advisors, wants to use an outside research firm’s ratings. She reviews its methodology, checks that it is independent and rigorous, finds it sound, and then relies on its reports in good faith for her recommendations.
Answer: Leela complies with Standard V(A). Reliance on third-party research is permitted once reasonable due diligence establishes that the provider’s work is sound.
Setup. Rohan, an analyst at the fictional Chenab Securities, receives a glowing report on a small manufacturer from an outside research shop. He notices that the report was paid for by the manufacturer itself and that its revenue figures do not reconcile with the company’s own filings, yet he forwards its buy rating to clients unchanged because he is short of time.
Answer: Rohan violates Standard V(A). Third-party research may be relied on only with a reasonable basis to trust it; once he has reason to doubt its independence and its accuracy, forwarding it unchanged rests on no reasonable basis.
Standard V(A) applies to quantitative models, algorithms, and data-driven processes just as it does to traditional analysis. If you use a model to screen securities, construct portfolios, or generate signals, you must understand its parameters, the assumptions built into it, and its limitations, and you must understand how its outputs are used. Treating a model as a black box, acting on its results without grasping how it works or where it breaks down, is not a reasonable basis.
The guidance holds those who create models to a higher standard than those who merely use them. A builder must test the model rigorously across a range of conditions, including stressed or unusual scenarios, not only the benign ones. A user must at least understand enough to know the model’s assumptions and the circumstances in which its outputs become unreliable. As models grow more complex and more central to decisions, this duty to understand what sits beneath the numbers only grows.
The reason the standard is higher for builders is that they alone are positioned to know where a model is fragile. A user sees outputs; a creator sees the assumptions, the data the model was fitted on, and the boundaries beyond which its logic no longer holds. A model calibrated on calm markets may behave sensibly until conditions turn extreme, at which point untested assumptions can produce confidently wrong answers. That is why testing across stressed scenarios is not optional for a builder: a model that has only ever been checked in favourable conditions has not really been checked at all. For users, the practical duty is humbler but real, to know enough to recognize when a model is being pushed outside the conditions it was built for, and to stop trusting it blindly there.
Reasonable basis scales with your role and the tool. Relying on a colleague’s or vendor’s research needs due diligence on the source; relying on a model needs an understanding of its assumptions and limits; building a model needs rigorous testing across conditions. In every case the question is the same: is there sound work, that you understand, behind the recommendation? A black box you cannot explain is never a reasonable basis.
Members and Candidates must:
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard V(B) governs how you communicate analysis and recommendations, and it has several distinct requirements. Taken together they ensure the client understands what they are getting, how it was arrived at, what could go wrong, and what is fact versus judgment. The exhibit lists the five duties; the text below explains each.
| Requirement | What you must disclose or do |
|---|---|
| Nature and cost of services (2023) | Disclose what services you provide and the costs the client will bear for them |
| Investment process | Disclose the basic format and general principles of your process, and promptly flag material changes |
| Limitations and risks | Disclose significant limitations and risks of the investment process |
| Important factors | Use reasonable judgment to identify and include the factors important to the analysis |
| Fact versus opinion | Clearly distinguish fact from opinion in presenting analysis and recommendations |
The nature and cost of services requirement, added in 2023, is the newest and a likely exam target. Clients are entitled to understand what a member actually does for them and what it costs, so that they can decide whether to engage and can judge the value they receive. Costs here are not only the headline management fee; they include the other charges a client bears in connection with the service, so that the client can see the full price of the relationship rather than a partial figure. The logic is straightforward: a client cannot judge whether advice is worth paying for if the price is obscured, and hidden or understated costs quietly erode the returns the client is relying on. The investment process requirement asks you to explain the basic format and general principles of how you analyze investments, select securities, and build portfolios, and to promptly disclose material changes to that process, because a client’s understanding of the strategy is part of informed consent. The limitations and risks requirement means you must not present only the upside: the significant risks and the limits of your approach have to be communicated so the client sees the whole picture rather than an attractively edited version of it. Silence about a material risk is itself a form of misleading the client, because it leaves them to make a decision on incomplete information they had every right to receive.
The important factors requirement calls for judgment: you must identify which factors genuinely matter to an analysis and include them, rather than burying the client in detail or omitting what is decisive. Finally, the fact-versus-opinion requirement is one of the most tested ideas in the whole module: you must clearly distinguish what is established fact from what is your projection, estimate, or opinion. Presenting a forecast as though it were a certainty, or an opinion as an established fact, misleads the client about the reliability of what they are hearing.
It is worth seeing what ties these five requirements together: they all serve the client’s ability to make an informed decision. A client who does not know what a service costs, how the strategy works, what could go wrong, which factors drove the view, or which parts are fact and which are judgment is not in a position to give real consent or to evaluate the advice. V(B) is therefore less a checklist than a single duty of candour expressed in five ways. When a scenario shows a client kept in the dark on any of these dimensions, the same underlying failure is present: the member has substituted their own comfort or convenience for the client’s right to understand.
The investment process requirement deserves a second look because the duty to disclose material changes is easy to forget. Telling a client at the outset how you invest is only half of it; if you later change the strategy in a way that matters, shifting to a different style, adding leverage, or changing the kinds of instruments you use, you must promptly tell the client, because the change alters the risk and character of what they signed up for. A member who quietly drifts from the disclosed process, even with good intentions and good results, has denied the client the chance to decide whether the new approach still suits them. The obligation is proactive: the client should not have to discover a strategy change after the fact from a surprising statement or an unexpected loss; they should hear of any material change promptly, from the member, while they can still act on it.
Disclosing the process is not the same as disclosing individual holdings. V(B) asks you to explain the general format and principles of how you invest, the strategy and its logic, not to reveal every position or proprietary detail. A member can fully satisfy V(B) while keeping specific security selections confidential, as long as the client understands the approach, its risks, and any material change to it.
Setup. Nikhil, an adviser at the fictional Kosi Wealth, tells a client that a stock “will reach” a price target within a year and that its dividend “is guaranteed to grow”, presenting his own optimistic projections as settled facts, and does not mention the key risks to the thesis.
Answer: Nikhil violates Standard V(B). He must present his projections clearly as opinion and disclose the significant risks and limitations, so the client understands the reliability of the view.
Setup. Sana, an adviser at the fictional Beas Wealth, quotes a new client a headline advisory fee of 1 percent but does not mention the platform charge and the transaction costs the client will also bear, and she describes her expected 12 percent annual return as what the portfolio “will deliver” rather than as a forecast.
Answer: Sana violates Standard V(B). She must disclose the full nature and cost of her services, including all charges the client bears, and present the expected return clearly as opinion rather than as a guaranteed fact.
Name the five things a member must disclose or do when communicating with clients under Standard V(B).
Disclose the nature and cost of the services provided (the 2023 addition, covering the full costs the client bears, not only the headline fee); disclose the basic format and general principles of the investment process and promptly flag material changes to it; disclose significant limitations and risks; use reasonable judgment to identify and include the factors important to the analysis; and clearly distinguish fact from opinion.
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.
Verbatim wording of the Standard as published by CFA Institute; all explanation and examples below are MidhaFin’s own.
Standard V(C) requires you to develop and maintain appropriate records supporting your analysis, recommendations, actions, and other investment-related communications with clients. Records are what allow work to be reconstructed and verified, and they are the backbone of every other duty in Standard V: a reasonable basis you cannot document is hard to demonstrate, and a communication you cannot evidence is hard to defend.
Two practical points matter for the exam. First, these records are generally the property of the firm, not the individual, which connects directly to Standard IV: when you leave an employer, you may not take the supporting records, files, or models with you, and you must recreate any analysis at your new firm from public sources or fresh work. Second, retention is often governed by regulatory requirements that specify how long records must be kept; in the absence of a specific rule, the guidance points toward keeping records for a reasonable period. Following the applicable regulatory retention period, and the firm’s policy, is the recommended practice.
It is easy to underrate record retention as mere administration, but it underwrites the credibility of everything else in Standard V. If a recommendation is later questioned, the records are what show that a reasonable basis existed and that the client was properly informed; without them, a member cannot demonstrate compliance even when they in fact complied. Records also protect the client and the firm by making it possible to reconstruct what was known and decided at the time, rather than relying on memory after the fact. The habit to build is simple: keep the research, the reasoning, and the client communications that support each recommendation and action, in a form the firm can retain for as long as the rules require.
The ownership point rewards a moment’s care because it sits at the junction of Standards V and IV. The individual did the analysis, but the records of that analysis belong to the employer whose resources produced them, so they cannot travel to a new firm. A member starting fresh elsewhere is free to rebuild a view using their own knowledge and public information, but must not carry over the old firm’s files. Recognizing that the same set of documents is both a V(C) record-retention matter and a IV(A) firm-property matter helps you answer a departure scenario cleanly, because both Standards point to the same conclusion: the records stay behind.
Setup. On leaving the fictional Yamuna Capital, Aditi wants to keep the detailed models and research files she built there, reasoning that since she did the work, the records are hers to take to her new employer.
Answer: Aditi may not take the records. Under Standard V(C) they are the firm’s property; she must recreate any needed analysis at her new employer from her own knowledge and public sources.
Setup. Vikram, a portfolio manager at the fictional Ravi Asset Management, makes several large trades on the strength of his own detailed analysis but keeps no working papers, models, or notes, deleting his files once each trade is placed. Months later a client questions one recommendation and the firm can find nothing to show the basis for it.
Answer: Vikram violates Standard V(C). He must develop and maintain appropriate supporting records, which are the firm’s property and must be retained for as long as the applicable rules require.
An analyst built a valuation model using her firm’s data and resources. On leaving, may she keep a personal copy of it, and who owns the supporting records she created?
No, she may not keep a copy. Records that support analysis, recommendations, and actions are the property of the firm whose resources produced them, not of the individual who did the work. On leaving she must leave the model and files behind and may rebuild any needed analysis at her new employer from her own knowledge and public information.
Standard V rewards knowing, for each sub-section, the practice that keeps the duty. The table below gathers the main ones together so you can revise the whole of the Standard efficiently as a set of duty-and-procedure pairs. Read across each row as a pairing of the obligation with the concrete step that satisfies it, which is the form most exam questions ultimately test.
| Sub-section | Key recommended practices |
|---|---|
| V(A) Diligence and Reasonable Basis | Base recommendations on adequate, independent research; do due diligence on third-party research and vendors; understand models’ assumptions and limits; use written due-diligence guidance |
| V(B) Communication with Clients | Disclose the nature and cost of services and the investment process; communicate significant risks and limitations; include the important factors; label fact and opinion clearly |
| V(C) Record Retention | Keep records that support analysis, recommendations, actions, and communications; follow regulatory retention periods; remember records are firm property |
Route Standard V questions by stage. A recommendation with thin research, blind reliance on others, or a misunderstood model points to V(A). A communication that hides costs or risks, omits key factors, or blurs fact and opinion points to V(B), and remember the 2023 nature-and-cost disclosure. A question about keeping, or taking, supporting records points to V(C), where records are firm property.
Fact versus opinion is the single most tested phrase in Standard V(B). Any time a scenario shows a projection, target, or forecast presented as a certainty, or an opinion dressed as an established fact, V(B) is engaged. The fix is never to stop forecasting; it is to label the forecast honestly as opinion, so the client can weigh its reliability.
A recommendation was based on thorough, independent research but the investment still lost money. Is Standard V(A) violated?
No. V(A) judges the process, not the outcome. A recommendation supported by a diligent, reasonable basis at the time it was made complies even if the investment later performs poorly. A poor outcome does not, by itself, indicate a violation.
May a member rely on a research report the analyst personally disagrees with?
Yes, if the report has a reasonable and adequate basis. Under the group-research guidance, a member need not decline to be associated with a report merely because their own opinion differs, provided the process behind the conclusion was sound.
What must a member understand before relying on a quantitative model under V(A)?
Its parameters, the assumptions built into it, its limitations, and how its outputs are used. Treating a model as a black box is not a reasonable basis. Those who build models are held to a higher standard and must test them across a range of conditions, including stressed scenarios.
Who owns the records that support a member’s analysis, and what follows when they leave?
The records are generally the firm’s property. On leaving, the member may not take the supporting records, files, or models, and must recreate any needed analysis at the new firm from personal knowledge and public sources. Regulatory rules often set how long records must be retained.
V(A) Diligence and Reasonable Basis, V(B) Communication with Clients and Prospective Clients, and V(C) Record Retention. They track a recommendation from the research behind it, through how it is communicated to the client, to the records that support it.
A recommendation or action supported by appropriate research and investigation and by diligent, independent, thorough analysis. What is reasonable depends on the complexity of the decision and the resources available, but the process must be sound. Importantly, V(A) judges the quality of the process, not the outcome, so a well-researched recommendation that loses money is not a violation.
Yes, with conditions. Secondary (in-firm) and third-party (outside) research may be relied on when the member reasonably believes it is sound, and for outside providers due diligence on methodology and independence is the recommended practice. For group research, a member need not decline to be associated with a report they personally disagree with, provided it has a reasonable and adequate basis.
That the member understand the model’s parameters, assumptions, and limitations and how its outputs are used, rather than treating it as a black box. Those who create models are held to a higher standard and must test them rigorously across a range of conditions, including stressed scenarios.
The nature and cost of the services provided (added in 2023); the basic format and general principles of the investment process, with prompt disclosure of material changes; significant limitations and risks; the factors important to the analysis; and a clear distinction between fact and opinion. Together these let the client understand what they are getting and how reliable it is.
Because presenting a projection, target, or forecast as a certainty, or an opinion as an established fact, misleads the client about how reliable the information is. Standard V(B) requires forecasts and judgments to be clearly labelled as opinion, so clients can weigh them appropriately. It is one of the most frequently tested points in the Standards.
No. Standard V(B) asks you to disclose the basic format and general principles of your process, the strategy and how it works, and to promptly flag material changes to it. It does not require revealing every individual security selection or proprietary detail. A member can satisfy V(B) while keeping specific positions confidential, as long as the client understands the approach, its risks, and any material change.
Records that support analysis, recommendations, actions, and client communications are generally the property of the firm, not the individual. On leaving an employer, a member may not take these records and must recreate any needed analysis from personal knowledge and public sources. Regulatory requirements often set the minimum retention period.
Through scenarios routed by stage: thin research, blind reliance on others, or a misunderstood model points to V(A); communication that hides costs or risks, omits key factors, or blurs fact and opinion points to V(B); and keeping or improperly taking supporting records points to V(C). The 2023 nature-and-cost disclosure under V(B) is a likely new-material target.
Loading comments...
Add your Thoughts: