When considering replacing a client's existing investment with a new product, what duty applies?

• A. Replace whenever possible
• B. Do not consider taxes
• C. Ensure replacement serves the client's best interest, considering costs, taxes, and portfolio impact
• D. Only consider the client's initial investment amount

Answer: (C)

When replacing an existing investment with a new product, the advisor must act in the client’s best interest, weighing costs, taxes, and the impact on the overall portfolio. This means carefully assessing whether the replacement will improve after-tax returns, risk-adjusted performance, or diversification, and does so in a way that supports the client’s goals, time horizon, and financial plan. Consider transaction costs, fees, potential tax consequences from selling and buying, and how the new holding changes the portfolio’s balance, liquidity, and risk exposures. Replacements should be justified with a clear, client-centered benefit and not pursued merely to push a new product or to earn a commission. If there isn’t a demonstrable benefit after these factors, the replacement should not occur.