What does Standard V require for investment analysis? How do I demonstrate 'reasonable basis'?

Standard V ensures that investment recommendations are well-founded and clearly communicated.

Standard V(A) — Diligence and Reasonable Basis:

You must exercise diligence, independence, and thoroughness when making investment recommendations. A recommendation must be supported by appropriate research.

What constitutes a reasonable basis:

• Thorough analysis of the company's financial statements
• Understanding of the industry and competitive environment
• Consideration of relevant quantitative and qualitative factors
• Use of appropriate valuation models
• Assessment of the quality and reliability of data sources

Using third-party research:

You CAN rely on third-party research (sell-side reports, external models) BUT you must:

1. Evaluate the methodology and assumptions
2. Understand the research well enough to defend it
3. Not blindly pass through recommendations without review

Standard V(B) — Communication with Clients:

Disclose the basic format and principles of the investment process. Specifically:

• Distinguish between fact and opinion in your analysis
• Identify important factors and limitations
• Disclose changes in methodology or risk models

Standard V(C) — Record Retention:

Maintain records supporting your analysis and recommendations. The CFA Institute recommends keeping records for at least 7 years (though local laws may require more or less).

Practical Example:

Amira, an analyst at Pine Harbor Capital, recommends buying Osprey Dynamics stock based solely on a tip from a friend who works in the industry. She has not reviewed financial statements, built a model, or examined competitive positioning. This violates Standard V(A) — she lacks a reasonable basis.

Corrected approach:

Amira should: (1) analyze Osprey's financials, (2) build or review a valuation model, (3) assess the industry outlook, (4) document her analysis, and then make a recommendation supported by evidence.

When you disagree with your firm:

If your firm issues a recommendation you believe lacks reasonable basis:

1. Express your concerns through proper internal channels
2. If the firm proceeds, you may need to dissociate (request your name be removed from the report)
3. You are NOT required to resign, but you cannot put your name on analysis you believe is unsupported

Exam tip: Standard V questions often test whether the analyst did enough research before making a recommendation. Look for shortcuts in the analysis process — that's usually the violation.

Practice Standard V scenarios in our CFA Level I question bank.