THE CONCLUDING PARAGRAPH OF THE BROCHURE STATES, "WE BELIEVE...

Question

500. The concluding paragraph of the brochure states, "We believe long-term use of this trading

strategy will lead to superior performance compared with the S&P 500." The brochure includes

a footnote in small print stating, "Results are gross before taxes and thus may be higher than

actual results would have been over the given period. Past performance cannot guarantee

future results."

At Twain, Litman has discretionary authority over 30 individual clients who hold both stocks and

bonds in their portfolios. His 10 largest clients vary widely in age, occupation, and wealth. For a

variety of reasons, each of these accounts requires significant attention. The remaining two-

thirds of Litman's clients are stable, long-term investors, all of whom are saving for retirement.

Litman performs comprehensive quarterly reviews with the owners of the 10 largest accounts

and similar annual reviews with the remaining clients. Recently, he made an exception to this

rule when he learned that one of his smaller, less active clients had unexpectedly inherited

$600,000 from an aunt's estate. Litman met with the client and performed a comprehensive

review of the client's financial situation even though only three months had passed since their

last meeting.

Twain hires a compliance officer and subsequently experiences significant change during the

following year. The compliance officer immediately begins to update the firm's policies and

procedures even though Twain adheres to the Asset Manager Code of Professional Conduct. In

addition, after a thorough analysis, Twain senior management decides to outsource its back-

office operations and hires an independent consultant to review client portfolio information. At

the same time, they add several research and investment staff members and upgrade the

information management system. They also eliminate paper records in favor of electronic copies

and develop a business-continuity plan based on current staffing.

Eighteen months later, the compliance officer resigns. Rather than hire an external replacement,

management designates one of Twain's senior portfolio managers as the new compliance

officer. The compliance officer reviews both firm and employee transactions and reports to the

CEO rather than to the board of directors.