Financial Advisor Quick Study

Investment Goals

"Where do they want to be" - Planning for college education - Retirement - Saving for future purchase - Philanthropy - Capital to start a business - Leaving a legacy

Equity-Linked Notes (ELNs)

**Debt instruments where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index. In the case where the note is based on the return of an index, the security would be known as an index-linked note. In the instances where the securities are traded on an exchange (most still are not), they are generally referred to as exchange-traded notes (ETNs). ELNs, exchange-traded or not, are considered alternative products with unique risks, and therefore, not suitable for most investors. Risks: - Credit risk (ELNs/ETNs are unsecured debt obligations) - Market risk - Liquidity risk (although exchange-traded, a trading market may not develop) - Call, early redemption, and acceleration risk (ETNs may be called at the issuer's discretion) - Conflicts of interest [the issuer may engage in trading activities that are at odds with note holders (shorting, for instance)]. - Maturity payment based on return on stock or index *THESE ARE DEBT SECURITIES, NOT EQUITY *Structured product

Defined Contribution Plan

*Annual contribution is pre-determined (Fixed) *Retirement benefits are uncertain *YOUNGER employees benefit the MOST *More Risk to EMPLOYEE *MOST POPULAR *Benefit amount is VARIABLE, Contribution amount is FIXED Contribution Plans: 1) Money-purchase pension plan 2) Profit Sharing plan (qualified) 3) 401(k) Plan 4) SIMPLE Plans 5) 403B

Defined-Contribution Plan

*Annual contribution is pre-determined (Fixed) *Retirement benefits are uncertain *YOUNGER employees benefit the MOST *More Risk to EMPLOYEE *MOST POPULAR *Benefit amount is VARIABLE, Contribution amount is FIXED *Employees carry investment performance risk *NOT 100% vesting ready immediately Contribution Plans: 1) Money-purchase pension plan 2) Profit Sharing plan (qualified) 3) 401(k) Plan 4) SIMPLE Plans 5) 403B

Sole Proprietorship

*Does not protect owners' personal assets from losses incurred by the business - The owner is liable for all the debts of the business. Responsible if the business liquidates, you could lose everything

Margin Document/Disclosure

*Must be provided on ANNUAL basis to margin customers Includes: - Customers can lose more money that initially deposited. - Customers are not entitled to choose which securities or other assets in their account(s) are liquidated or sold to meet a call for additional funds. - Customers are NOT entitled to an extension of time to meet a margin call. - Firms can increase their in-house margin requirements without advance notice.

Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker-dealer charges the client interest on the monies borrowed in the amount of $133. At the end of the month, the value of the stock drops to $36,000. The month-end statement for this client will show a debit balance of

- $20,133 *A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.

If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of

- $5,000 *Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).

UTMA

- Buy or sell securities or other assets, such as real estate, in an UTMA; - Exercise rights or warrants; - Liquidate, trade, or hold securities. Registered representatives should know the following UGMA/UTMA custodial account rules: - All gifts, (and transfers in the case of UTMA), are irrevocable. - An account may have only one custodian and one minor or beneficial owner. - A donor of securities can act as custodian or appoint someone to do so. - Unless acting as a custodian, parents have no legal control over an UGMA/UTMA account or the securities in it. - A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one UGMA/UTMA, provided each account benefits only one minor. - The minor has the right to sue the custodian for improper actions. - These can only be opened as cash accounts—margin is NOT allowed. What type of account allows for the irrevocable transfer of almost any kind of asset, including works of art and real estate, for the benefit of a minor? -UTMA

Dollar Costs Averaging

- Buying more when low and less when high - End up with lower than average cost basis than those of underlying shares. Doesn't guarantee profit. Dollar-cost averaging means investing money in equal portions, at regular intervals, such as monthly or quarterly. This strategy is most effective when prices in the market are volatile.

Key Points About Roth IRA

- Contributions are NOT tax deductible. Always tax free contributions. - Distributions are tax-free if taken after age 59½ and a Roth account has been open for at least 5 years. - Contributions can be made at any age as long as there is earned income. and if income is not too high. - Distributions are not required to begin at age 72. - If because of death, disability, or first-time home purchase, the distribution is qualified and not subject to tax or the 10% penalty. - As with all IRAs, there must be a named beneficiary (who can be a minor). - The contributions (all made with after-tax money) may always be withdrawn without tax or penalty. It is only the earnings where the five years/age 59½ rules apply to avoid tax and penalties. - Cannot contribute the maximum in both a traditional and a Roth. - Better for younger individuals with lower income Characteristics: *Tax Free Growth *Early Withdrawal Penalty *Tax Free Distribution *After Tax Contribution *Funded with earned income

Tenancy By The Entirety (TBE) (ONLY MARRIED)

- Each cotenant has undivided interest in account - Can be created ONLY by married persons - Consent of the other tenant IS required before the other tenant can sell or give away interest in the property - Passes to surviving spouse at death - Most commonly used for ownership of real property (Real estate) and almost never for an account at a securities firm - Considered a single owner - no separate shares - Checks or distributions must be made payable in the account name and endorsed by all parties

Qualified Plans

- Employer contributions are a current deductible expense, - Employee contributions are generally made with pretax money, - All earnings and growth in the account is tax-deferred until withdrawal - Certain protections are offered to employees under ERISA.

Equity Index Annuity (EIA)

- Not a variable annuity (Fixed annuity) - Not a security because you CAN'T lose money on it - Participation rate (90% and market goes up 10%, you get 90% of that or 9%) - CAPS - Capped at 15%, total of $100K, participation rate at 80%, how much will you have after year 3? - Year 1 = Up 10% = $108K - Year 2 = Down -3% = $108K (If index goes down, annuitant DOES NOT lose money) Negative: - Longer surrender charge periods (As long as 15 years)

ESA Features

- Provisions that allow contributions to continue past age 18 for beneficiaries with special needs - Allowing Coverdell ESA contributions, for any year, to be made up to April 15 of the following year (just like contributions to your IRA). - Contributions can be made by parents and other adults (Anyone); the total for one child is $2,000. - Contribution limit is $2,000 PER YEAR, PER CHILD until the child's 18th birthday. - Contributions are not tax deductible, but all earnings are tax-deferred. - Distributions are tax-free if they are taken before age 30 and used for eligible education expenses. - If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and, in addition to the obvious, includes cousins, aunts and uncles, and even in-laws. - Funded with AFTER TAX contributions - Can be for high school or college costs

ESA (Coverdell)

- Provisions that allow contributions to continue past age 18 for beneficiaries with special needs - Allowing Coverdell ESA contributions, for any year, to be made up to April 15 of the following year (just like contributions to your IRA). - Contributions can be made by parents and other adults (Anyone); the total for one child is $2,000. - Contribution limit is $2,000 PER YEAR, PER CHILD until the child's 18th birthday. - Contributions are not tax deductible, but all earnings are tax-deferred .- Distributions are tax-free if they are taken before age 30 and used for eligible education expenses .- If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and, in addition to the obvious, includes cousins, aunts and uncles, and even in-laws.- Funded with AFTER TAX contributions - Can be for high school or college costs (Primary or secondary education) The Coverdell offers greater investment flexibility. (Better than 529) Primary schools are called elementary schools, intermediate (upper primary or lower secondary) schools are called middle schools, and secondary schools are called high schools.

Simplified Employee Pension Plans (SEP IRA)

- Qualified plan that is funded by an employer rather than individual - Must be 21 and have performed services for employer during 3 of last 5 years and received at least $650 in compensation - Allows employer to contribute up to 25% of employees salary - Fully vested immediately - Employer contributions are tax deductible to employer. Not taxable on employee until withdrawn. Earnings accumulate tax deferred

Donor Advised Funds (DAF)

- Separately identified fund or account that is maintained and operated by a 501(c)(3) organization. (Sponsoring organization) - $100K may be donated at one time or periodically, real benefit to tax payer is that there is one tax statement at end of year.

Transfer on Death (TOD)/ Payable On Death (POD)/ Totten Trust

- Simplest way to keep assets held in brokerage accounts from becoming subject to probate upon client's death and be distributed specifically as account owner wishes. - Does NOT avoid estate taxes if applicable. - Owner has right to change beneficiaries at any time and provide unequal distributions - TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate. - The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS Totten Trust (Poor Man's Will) - Allow transfer of bank account

Variable Annuity (Non Qualified)

- Tax Deferred (10% penalty for distribution prior to 59 1/2) - Taxed in excess of basis (LIFO) - Surrender Charges - Taxed as ORDINARY INCOME (No capital gains with retirement plans) *Higher cost basis and thus LOWER taxable amount Variable annuities pay variable payments once annuitized, do not guarantee a rate of return, and are not considered liquid investments; they do offer multiple investment options through the subaccounts. - Monthly payout varies - Variable rate of return - Investment risk assumed by annuitant - Portfolio of equities, debt, money market instruments - Separate account - Resistant to inflation - Insurance and securities regulation Risk: - Inflation - Interest Rate - Market

Go Bonds

- Taxes you're OBLIGATED to pay. - Capital improvements that benefit ENTIRE community. (Do NOT produce revenues) Characteristics: - Backed by full faith and credit of issuer (Funded by state or local taxes) - Voter approval REQUIRED - If issued by local (not state) and political subdivisions, backed by Ad Valorem taxes *Principal and interest MUST be paid by taxes collected by municipal issuer *Taxes are based on ASSED VALUE *Voter approval may be required for new bond issues for construction of: 1) State Prisons 2) Public High Schools - Limited Tax GOs - Secured by a specific tax (Income Tax) (More risk) Issuer is limited to what tax or how much can be used to service debt - Debt ceiling or limit opposed on issuer (Lower the statutory debt limit, the safer for bondholders) - Do not produce revenue - Interest Rates Go UP, Bonds go DOWN (Flip Flop) ***Mill Rate X Assessed Value *Ratio of taxes collected to taxes levied might be used in analysis for GO Issuers Economic Health: - Income per capita - Employment - Population trend - Economic diversity - Ability to raise taxes *Sources of Revenue: - Ad Valorem - Sales Taxes - Fines - Income Taxes - Gasoline - License Fees and Assessments Source of Debt Service for a CITY issued GO Bond: 1) Real Estate Taxes or Licensing Fees Risks: - Default Risk Negative Indications: 1) Unemployment 2) Delinquent Taxes 3) Municipal Operating Expenses Keywords: - Full faith of issuer - Backed by taxing power of issuer - Voter approval (Voter Referendum) - Coterminous (Overlapping debt) - Mil Rate - Bond Resolution *Which debt issues would produce tax-free interest at ALL levels? -- GO bonds issued by GUAM (Issues from a territory of US, produce interest that is tax free at federal, state and local level)

Community Property With Rights of Survivorship (CPWROS)

- Used in community property states (9 states) - Allows married couples to share property, like a home, equally - Legally each one has 50% interest - When first dies, entire home is then owned by survivor - Avoids probate

Not A Security

1) Insurance or endowment policy or annuity contract (Fixed) 2) Interest in a retirement plan, such as IRA or 401K 3) Collectibles 4) Commodities - Precious metals and grains (Futures and forwards) 5) Condominiums used as a personal residence 6) Currency

Form ADV

A = Adviser (IA) B = Bodies (People) (IAR's) 1A - Business name, form of ownership - control persons (Federal covered and State IA's) Part 1A is the form used by all applicants for registration as an investment adviser. 1B - Disclosure Reporting Pages (DRPs) - Details about disciplinary events involving the adviser or affiliates (State ONLY) If the applicant is registering on the state level, Part 1B is also required. 2A - Create narrative brochures containing information about firm (Firm Brochure) Part 2A is the brochure 2B - Brochure supplements containing information about certain supervised persons Part 2B is the brochure supplement. *ADV 2 - Deliver to a client or prospective client the current brochure and supplement before or at the time of entry into in an investment advisory contract - FEDERAL = NO time requirement to deliver (48 hour Rule) - STATE = Deliver 48 hours in advance or have 5 days to rescind without penalty *Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets. UPDATING FORM: - Updated ANNUALLY - Should information change (Material Change) - Prompt notification must be given in Part 1 - File an annual updated amendment within 90 DAYS after the end of the advisor's fiscal year. (Making sure over 90 million) - If there are material changes in the brochure (ADV 2) - deliver to client annually within 120 days after the end of fiscal year - No material changes, no brochure or summary

REITS

A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its taxable income to investors. *Owner of REIT hold an undivided interest in a pool of real estate investments *Liquid because they trade on exchanges and OTC *NOT investment companies (Mutual funds) *Offer dividends and gains to investors but NOT flow through losses like LP's, NOT considered DPP

Tenants In Common (TIC)

A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate. Each party must specify a percentage of interest in the account *Most commonly used for non-spousal relatives or friends *Ownership CAN be unequal - Do NOT need to make equal investments or have equal interest in the property in account **Goes to estate - Does NOT avoid probate - Checks or distributions must be made payable in the account name and endorsed by all parties

Industrial Development Revenue Bonds (IDRs)

A municipal development authority issues industrial development revenue bonds (IDRs or IDBs) to construct facilities or purchase equipment, which is then leased to a corporation. The municipality uses the money from lease payments to pay the principal and interest on the bonds. The ultimate responsibility for the payment of principal and interest rests with the corporation leasing the facility; therefore, the bonds carry the corporation's debt rating. Some of these bonds are subject to the alternative minimum tax (AMT). *Discuss Tax bracket of individual and AMT *Highest credit risk -- debt service is the responsibility of the corporation leasing the facility rather than the issuing municipality *If industrial development bonds are called because of condemnation, this would be covered under -- Catastrophe *Backed by corporate credit (Lease back)

S Corp

Although taxed like a partnership, offers investors the limited liability associated with corporations in general. The profits and losses are passed through directly to the shareholders in proportion to their ownership in the S corporation. *Maximum of 100 shareholders *No Non-resident aliens *No more than one class of stock (presumably common) *Allows flow-through of business income and losses in order to avoid double taxation (Incorporated Business Model)

ETF

An ETF registers with the SEC under the Investment Company Act of 1940 either as a unit investment trust (UIT ETF) or as an open-end management company (open-end ETF). (Mostly Open End Companies) ETFs can be purchased on margin and sold short Expenses tend to be lower than those of mutual funds There can be tax advantages to owning ETFs. Not Redeemable by the issuer All trading taking place in the secondary markets, delivery of a prospectus is not required. ETFs trade at, or very close to, their NAVs. *Most ETF's have a LOWER expense ratio than comparable mutual funds *ETFs are a way of investing in equity (stock) or debt (bonds) securities and are not a separate asset class. (DON'T include when allocating among asset classes) Uses of Index ETF's: - Asset allocation - Following industry trends - Balancing a portfolio - Speculative trading - Hedging Differences between ETF and Index Mutual Fund: 1) Intraday trading—Investors do not have to wait until the end of a trading day to purchase or sell shares. ETF shares trade and are priced continuously throughout the day, making it easier for investors to react to market changes. 2) Margin eligibility—Index ETF shares can be purchased on margin, subject to the same terms that apply to common stock. 3) Short selling—Index ETFs can be sold short at any time during trading hours. Risks: 1) Index Risk 2) Tracking Risk

Deferred Compensation Plan

An agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. *Lower tax bracket at retirement age (persons affiliated with the company solely as board members are not eligible for these plans because they are not considered employees for retirement planning purposes). *Risky because the employee covered by the plan has NO right to plan benefits if the business fails. (Employee becomes creditor of firm) *May also forfeit benefits if they leave the firm before retirement. *Taxable as ordinary income to the employee. *Employer is entitled to tax deduction at the time the benefit is paid out. *Benefits highly compensated employees who are just a few years from retirement NONQUALIFIED: *Not qualified plan and may be discriminatory. Does not set standards for vesting, eligibility, and funding. *Often used by corporations to - Retain high salaried key employees

401K

An employee's elective deferrals are made with pre-tax dollars. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A 401(k) plan is a type of defined contribution plan

Sector Rotation

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts Cyclical = Do well in good times, poor in bad (Auto, heavy machine, steel) Defensive = Perform regardless (Utilities, food, pharmaceuticals) Counter-Cyclical = Precious metals

12b-1 Fees

Annual fees charged by a mutual fund to pay for marketing and distribution costs - What is it called when you take a % from a mutual fund?

Revenue Bonds

Backed by user fees (Choose to pay) (Self Supporting)(Airports, tolls, utilities (Water, sewer, electric), housing, transportation, education (College dorms and student loans), health (Hospitals, retirement centers), industrial, sports) (Excise taxes) Characteristics: *Not subject to statutory debt limits (Not repaid from taxes) and do NOT require voter approval *May be subject to an additional bonds test before subsequent bond issues with equal liens on the project may be issued *Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. *Generates sufficient Income *AMT only applies to Revenue Keywords: - User fees = choice - Covenants - Self supporting - Trust Indenture or Trust Resolution - Feasibility Study (estimates of revenues) - Condemnation (Considered a catastrophe and ONLY applied to revenue bonds *If someone is worried about AMT — No IDR's When assessing the quality of revenue bonds, consider: 1) Economic Justification -- Be able to generate revenues - Feasibility Study - Competitive Study - Debt Service Coverage Ratio 2) Competing Facilities -- Not be placed where better alternatives are easily available 3) Sources of Revenue -- Sources should be dependable 4) Call Provision 5) Flow of Funds -- Must be sufficient to pay all the facility's operating expenses What would affect credit rating of municipal revenue issues: 1) Quality of the facilities management 2) Debt service coverage ratio 3) Rate covenants set forth in the indenture

C Corp

Business structure that distinguishes the company as a separate entity from its owners. **If a business expects to need significant capital, this form is almost ALWAYS the preferred choice. *A C corporation is the ONLY business form where the tax and other consequences of the account do not accrue to the individual owners. Unlike the management of a partnership [the general partner(s)], in most cases, the corporation's officers and directors are shielded from personal liability for the corporation's debts and losses. Shareholders are also shielded from corporate creditors. That is the limited liability benefit of owning stock. Corporate income tax applies to the corporation as an entity rather than being passed through to the shareholder. If your client is a C corporation, you will only look at the corporation's financial needs and objectives when determining suitability. *Subject to double taxation *50% of corporate dividends excluded from income

529 (Considered a security)

Can now be used for qualified educational expenses for both primary and secondary education, are more beneficial then Coverdell for financial aid purposes. Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition Under the SECURE Act of 2019, plan holders can use 529 plans to pay a lifetime maximum of $10,000 to pay down student loan debt - It is the Section 529 plan that offers the greatest amount of control to the donor - Tax free if used for education - Donor retains control of asset!! - Does NOT allow catch up provision (Not a retirement plan) - Funds withdrawn for qualified education expenses are always free of FEDERAL income tax. - The maximum contribution limits are determined on a state level. - No contribution is tax deductible funds not used for health expenses may be invested in mutual funds and other securities. $17,000 or A special widower rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $17,000 = $85,000).

Capital Appreciation Vs Income

Capital Appreciation: 1) Growth stocks 2) Options 3) Futures 4) Special situation stocks 5) Day Trading Income: 1) Dividends on common stock 2) Foreign securities 3) High yield bonds

Commodities

Corn, Wheat, Oats, Soybeans, Beef, Pork, Eggs, Crude Oil, Coffee, Orange Juice, Industrial metals - aluminum, nickel, copper, lead, and precious metals

Debt Coverage Ratio (DCR)

Coverage = Available Revenues / Debt Service Requirement Example: $10,000,000 available revenues $4,000,000 Annual Debt Service $10,000,000 / $4,000,000 = 2.5 to 1

Discretionary Account

Customer may grant trading authority to RR to place trades without preauthorization. If RR selects any of 3 A's, it's a discretionary account: - Action - Asset - Amount *Time and price are NOT considered discretionary *Time or price - unless written instructions state time, it is effective only the day entered *Any response that include "AND" suggest more than one A needs to be controlled and is not accurate *Discretion is granted to RR, not the firm - If RR dies, authority ends *Discretion needs approval from customer/Principal The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.

Section 457 Plans

Deferred compensation plan set up under Section 457 of the tax code that may be used by employees of a state, political subdivision of a state, and any agency or instrumentality of a state. This plan may also be offered to employees of certain tax-exempt organizations (hospitals, charitable organizations, unions, and so forth, but NOT churches). - These plans are exempt from ERISA—nongovernmental plans must be unfunded to qualify for tax benefits, while government plans must be funded. - These plans are generally not required to follow the nondiscrimination rules of other retirement plans. - Plans for tax-exempt organizations are limited to covering only highly compensated employees, while any employee (or even independent contractor) of a governmental entity may participate. - Distributions from 457(b) plans of nongovernmental tax-exempt employees may not be rolled over into an IRA, but there is no 10% penalty for early withdrawal. - It is possible to maintain both a 457 and 403(b), or a 457 and 401(k) and make maximum contributions to both. You could also have an IRA along with the 457.

Intestate

Dying without a will

Defined Benefit Plans (Traditional Pension Plan)

Employer contributions to defined benefit or defined contribution (money purchase) pension plans are mandatory. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal. *Annual contribution is determined by yearly actuarial calculations *More Risk to EMPLOYER *Are Highly Compensated *OLDER employees benefit the MOST *Requires ACTUARY services - Must calculate annual contribution amount necessary to meet benefit requirement *Contribution amounts VARY, Benefit plans are FIXED *NOT suitable for buying muni bonds *Pays for life, based on formula

Defined Benefit Plans (Traditional Pension Plan)

Employer contributions to defined benefit or defined contribution (money purchase) pension plans are mandatory. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal. *Annual contribution is determined by yearly actuarial calculations *More Risk to EMPLOYER *Are Highly Compensated *OLDER employees benefit the MOST *Requires ACTUARY services - Must calculate annual contribution amount necessary to meet benefit requirement *Contribution amounts VARY, Benefit plans are FIXED *NOT suitable for buying muni bonds *Pays for life, based on formula *Employees carry NO investment performance risk *A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age as specified by the plan document. *Uses FINAL salary and length of service to determine payout

Community Property with Rights of Survivorship

Essentially combines joint tenancy and community property into one form of holding title

HSA

Funds not used for health expenses may be invested in mutual funds and other securities.

Allocation/Investment Objective

Growth = Common Stock, sector funds Income = Corporate Bonds, Preferred Stock, Blue Chips Safety/Preservation of Capital = Bills, Notes, Bonds, US Gov Securities, CDS, Money market funds (70+ age) Liquidity = Money Market Funds Speculation = Volatile stocks, high yield bonds, stock/index options, leveraged and inverse ETFs

Life only with Period Certain

Guaranteed a check for AT LEAST that guaranteed time. Upon untimely death, beneficiary continues to receive payment until whatever guaranteed payment period is Only if annuitant dies, then a beneficiary

Fixed Annuities

Guaranteed fixed rate of return (No investment risk, has inflation risk, not a security) - When election begins receiving income, payout is determined by accounts value and annuitants life expectancy based on mortality table - Monthly payout fixed - Guaranteed interest rate - Investment risk assumed by insurance company - Portfolio of fixed income securities and mortgages - General account - Inflation risk - Insurance regulation

Non-Qualified Plans

Higher cost basis = lower taxes @ retirement - Not subject to same reporting and disclosure requirements as qualified plans - Must be in writing and communicated to the plan participants - Sponsors of nonqualified plans are fiduciaries and can be held liable for acting contrary - Does not allow the employer a current tax deduction for contribution. Employer receives the tax deduction when the money is paid out to employee.

IRA

IRA contributions can be invested in stocks, mutual funds, bank accounts, and annuities. They CANNOT be invested in life insurance or collectibles

LLC

If a business owner's goal is ease in raising capital, the LLC is preferable because it has no restrictions on the number of nationality of investors. *Ease in raising capital *Limits Personal Liability

Delivery vs Payment (DVP); Receipt vs Payment (RVP)

In a DVP/RVP arrangement, payment for securities purchased is made to the selling customer's agent, and/or delivery of securities sold is made to the buying customer's agent in exchange for payment at time of settlement. Normally used for institutional accounts, this is a cash-on-delivery settlement. The broker-dealer handling the trade must verify the arrangement between the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale. DVP: *Used by institutions to purchase stock *Will NOT pay until delivered RVP: *When bank sells

Index Investing

Index investing involves investing in a portfolio that has a high correlation to a specific market index, such as the S&P 500. The advantages of this approach are its low cost and the guarantee of achieving returns that tend to match the market's performance. In exchange for these advantages, index investors give up the opportunity to beat the market. - Passive investment - Low management cost - Performance equal to overall market **Most tax efficient (Very little taxable gains)

Traditional IRA

Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age 59 1/2 *Must be EARNED INCOME under age 70 1/2 *May or may not be tax-deductible unless - Covered by employer sponsored plan and how much income you make *No limit on transfers, rollover is once per 12 months *Contributions are from earned income (Salary, Wages, Tips, Etc) *Tax free bonds, whether purchased individually or through a mutual fund or UIT, are considered INAPPROPRIATE investments because the tax-free benefit is lost. Suitable for IRA: - Writing Covered Calls - Buying puts on stock held long - A rated corporate bonds - Blue Chip common stocks - AAA rated US Government agency bonds ***All taxable distributions from a retirement account are taxed as ORDINARY INCOME, not capital gains 3 IRA Penalties: 1) 6% for excess 2) 10% for premature (59 1/2) 3) 50% for insufficient Exception To Tax Penalty: 1) Death 2) Disability 3) First Time Home Buyer ($10,000) 4) Education Expense 5) Medical Premiums 6) Medical Expenses in excess of AGI Characteristics: *Tax Free Growth *Taxable Distribution *Early Withdrawal Penalty *Deductible Contribution *RMD *Funded with earned income

IRA Investments

Ineligible Investments: 1) Collectibles (Antiques, Coins, Gems, Works of Art, Stamps, Etc) 2) Whole Life Insurance 3) Term Life Insurance Ineligible Investment Practices: 1) Short Sales of Stock 2) Speculative Option Strategies 3) Margin Account Trading May move investments through: 1) 60-day rollover 2) Direct Rollover 3) Trustee to Trustee Transfer

Diverse portfolio would hold tangible assets to address which risk?

Inflation (Hedge against inflation)

Point-to-Point

Interest in computed based on the value of the index at the end of the contract compared to the beginning

In a fixed annuity, the payment can be described as

Interest only

Demand Deposit (DDA)

Legal term for checking account. Considered short term funds and readily available. Provide safe but low retruns Held at banks and financial institutions from which funds may be withdrawn Historically referred to as checking accounts, now includes savings accounts and money market accounts

Annuitization

Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ORDINARY INCOME taxes are paid based on an EXCLUSION ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis (the original principal invested), and not subject to income taxes).

Revocable Trust

Living trust that has the permission to be revoked Among the benefits of a revocable trust is that the grantor (settlor) retains all control over the assets. There are no tax benefits and the grantor can be the beneficiary (and trustee) if the trust is set up that way. In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the grantor.

Testamentary Trust

MUST consult decedents WILL instructions *Only created by decedent's will **Once a testamentary trust has been created, it becomes a taxable entity in its own right and is thus subject to income taxes (Form 1041)

Living Trust

Made during the maker's lifetime. The settler transfers property into the trustand can remain thetrustee

Community Property

Marital property classification recognized by some, but not all states. Most property acquired during the marriage is considered to be owned jointly by both spouses and would be divided at the time of divorce, annulment, or death. *Varies from state to state *probably won't be tested

Complex Trust

May Accumulate Income (Taxed only if distributed) interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries

Per Stirpes

Means "Branch" - Beneficiary's share of the inheritance is to go to an heir Means per family line ie if 5 children and 1 dies, then 4 children and the kids of the 5th would get the $

Inflation Protection

Mid-cap stocks (see Glossary of Terms) have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPS is given as a choice).

Averaging

Most common is monthly average, can be best when markets are expected to be highly volatile

Simple Trust

Must be distributed in the year it was received (Taxed every year) Simple trusts may not make charitable contributions, and they provide no discretion on income distribution.

Deferred Compensation Plan

Non-qualified, may discriminate, no IRS approval needed - Used to attract key employees

Cost Basis

Pay estate taxes within 9 months of death Can get alternative pricing up to 6 months after death

Preservation of Capital

Preservation of capital means no fluctuations. Money market funds are the only logical choice here

Bid

Price at which an investor can SELL to a BD. Price at which an investor can redeem shares of mutual fund - Market maker buys, customer sells MMA: 22.05 - 22.25, 10 x 8. (First number is Bid - Lower Price) The next two numbers tell us the number of shares that quote is good for (in hundreds)

TIPS (Keeps pace with inflation)

Protects investors against purchasing power (inflation) risk. *Issued with a fixed interest rate but the principal amount is adjusted SEMIANNUALLY by an amount equal to the CPI. Does not receive until the bond matures, it is reported as income each year Benefits: 1) Semiannual adjustments to principal based on the Consumer Price Index (CPI) 2) Interest payments that keep pace with inflation *Fixed interest rate, par value changes *Principal value adjusted every 6 months (Par Value) *Pays interest every 6 months *Matures 5, 10 or 20 years *At maturity, principal will never be less than original 1,000 par *Helps with variable annuities *Exempt from state and local income taxes on the interest income generated, subject to federal taxation *Differ from all other US Treasury securities by subjecting the investor to Phantom Income

Solo 401K

Retirement plan that can maximize your savings if you're self employed or if you're a partner in a business whose only employees are the partners and their spouses

SIMPLE Plans

SIMPLEs are retirement plans for businesses with NO more than 100 employees that have no other retirement plan in place. - The employee makes PRETAX contributions into a SIMPLE up to an annual contribution limit, which CAN include catch-up contributions for those age 50 and older. The employer IS permitted to make matching contributions for employees.

Roth vs Traditional IRA

Similarities: ◆The dollar limits on annual contributions are the same—$6,500 plus a $1,000 catch-up for those age 50 and over. The contribution is limited to 100% of earned income. ◆Owners have discretion to invest assets in a variety of investment choices, and the prohibited transactions are the same as in traditional IRAs. ◆Earnings accumulate on a tax-deferred basis—i.e., without current tax consequence. Differences: ◆Roth IRA contributions are available only to taxpayers who have an income below a certain limit. Once a person's income exceeds the limit she can no longer contribute to the plan ◆Roth IRA contributions are always made with after-tax dollars (non-deductible). Pretax with traditional ◆Distributions from Roth IRAs are tax-free. ◆RMDs are never required from Roth IRAs during the account owner's lifetime. Question: What is acceptable? Answer: Gold or silver coins minted by the U.S. Treasury Department Fixed annuities REITs *Traditional IRA contributions are FULLY deductible no matter how much income is earned if the taxpayer is not covered by any other qualified plan.

Pattern Day Trader

Someone who executes 4 or more day trades in a 5-business-day period. The minimum equity requirement for pattern day traders is $25,000. That means they must have on deposit at least $25,000 in the account equity on any day in which day trading occurs. Before opening, Member must: 1) Provide risk disclosure 2) Approve the account for day trading (principal Approval) 3) No cross guarantee allowed

Municipal Issues

States, Cities, Counties, US Territories, Agencies and Authorities, School Districts/Taxing Districts *No Muni Bonds on Retirement Plans *Provide a form of prospectus known as an OFFICIAL STATEMENT (OS) *Interest on a municipal security is EXEMPT from the federal income tax (Called tax-exempt or tax-free investments) *The tax-equivalent yield for a municipal bond issued by an entity within a state with a state income tax will have a higher tax-equivalent yield to a resident of that state because of the "double" tax exemption. (Formula = Municipal Bond Coupon / 100% - Investors Tax Bracket) *For exam purposes, you NEVER recommend municipal bonds to investors unless they are in the higher tax brackets. *Capital Gains are NOT tax free *Might affect credit rating of municipal revenue issue: - Rate covenants set forth in the indenture - Debt service coverage ratio - Quality of the facilities management *Quotation on a municipal security between dealers is assumed to be - a Bona Fide Quote (Or firm quotes) (Required to be fair and reasonably related to current market) An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by -- holding the securities until they mature *Short Selling municipal bonds is almost NEVER done *Principal or agency trade appear on the confirmation statement for when-issued trade or municipal bonds (The capacity of the firm, principal or agent, must be disclosed on all confirms. The settlement date, accrued interest, and total price would not appear on a when-issued confirm.) Included on Securities Confirmation: 1) Capacity in which the BD acted 2) Whether securities are fully registered or book entry 3) Date of maturity that has been fixed by a call notice

Joint Tenants With Right of Survivorship (JTWROS)

Stipulates that a deceased tenant's interest in the account passes to surviving tenant(s). **Goes to surviving party All parties have an undivided interest in the account. *Common for married couples - No changes in any account name(s) can be made unless authorized by a QUALIFIED and REGISTERED Principal - Principal MUST be informed of essential facts in writing - Must have approval of other tenant but approval goes to Principal, Not RR. - No rules prohibiting opening account for unmarried persons. Must take all steps to understand death consequences *Mail may be directed to the joint owner agreed upon by both parties to the account -Orders may be entered by either party - Checks or distributions must be made payable in the account name and endorsed by all parties

Tax-Sheltered Annuities 403(B) Plans (TSA)

Tax-sheltered annuities (TSAs) offered through 403(b) plans are available to employees of: 1) Public educational institutions; 2) Tax-exempt organizations (501(c)(3) organizations) 3) Religious organizations. Tax Advantages: 1) Contributions (Which generally come from salary reduction) are excluded from a participant's gross income 2) Participants/ earnings accumulate tax-free until distribution *You might see a question that asks if a student can be a participant in an educational institution's TSA. The answer is NO, because the plan is only available to employees. *Qualified retirement plan *Contributions are made BEFORE taxes *Growth is tax deferred *Any distribution is FULLY taxable at ordinary income rate *Although can be made into mutual funds, some 85% of the funding is through annuities

457 Plan

The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. Question: City Fireman, what plan would be most appropriate? Answer: 457 (Government workers) - Can be used by employees of state, political subdivision of state, agency of state. Also, may be offered to certain tax-exempt organizations - hospitals, charitable organizations, unions, NOT churches - Nonqualified - Unfunded Deferred Compensation Plan - NOT covered under ERISA - Not required to follow nondiscrimination rules - Can own both 457 and 403B or 457 and 401K and make max contributions to both

Ask

The price at which an investor can buy a security - Market maker sells, customer buys MMA: 22.05 - 22.25, 10 x 8. (Second number is Ask - Higher price) A customer market order to BUY should be done at the best possible (lowest) ask (offering) ($22.25) (the 10 x 8 means bidding for 1000 shares and offering 800 shares

403B

The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were two different school systems with 403(b) plans.

Irrevocable Trust

The settlor gives up all ownership A properly constructed irrevocable trust removes the grantor's assets from the estate thereby ***eliminating estate tax*** (MOST IMPORTANT) on them. The grantor no longer has the power to change the beneficiary and cannot serve as trustee. The assets pass directly to the beneficiary without going through probate. Advantages: - It generally avoids estate tax. - Provide estate liquidity. - Insurance proceeds are removed from the estate of the insured for tax purposes.

Behavioral Finance

The study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases. 1) Overconfidence = Overestimate abilities 2) Conservatism = Hard time changing beliefs even when new info is presented 3) Herd = Following the masses 4) Anchoring = Base expectations upon first information. Difficult to move away from 5) Regret Aversion = Prepares to avoid distress over adverse outcome 6) Confirmation Bias = Look for new info to support existing views

Alternative Assets

This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors. *Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns. That is the prime reason for their popularity, especially with institutional investors.

Joint Account

Two or more adults are named on the account as co-owners, with each allowed some form of control over the account. In addition to filling out the appropriate new account form, a joint account agreement must be signed. *All parties must sign *While mail only needs to be sent to one of the parties to the account, checks for disbursements from the account must be made payable to all parties and endorsed by all parties in order to be deposited. Any required forms pertinent to the account, such as a margin agreement or options agreement, must be signed by all parties.

ADR's

Type of equity security designed to simplify foreign investing for US investors. Created when common shares are purchased in the foreign company's home market. Holding the ADRs in a portfolio entitles the investor to dividends paid in -- U.S. dollars and the ability to trade ADRs on U.S. securities markets - T+2 - Only taxable in US for capital gains - Trading profits would be taxed as capital gains - Owner of ADR may request that the depositary bank cancel the ADR and send them the underlying foreign shares - No voting rights, just foreign trading, dividends, and no preemptive rights *Trades are executed domestically in US dollars *Foreign corporation wants to see ADR issued for common stock for easier access to US capital markets * Facilitates investing in foreign securities in domestic exchange *Designed to simplify foreign investing for US investors, helps foreign companies attract US investor base - Are US Issued Securities Suitable For: 1) Diversification** (Primary Benefit) 2) Adds exposure to foreign stock (Equity) Risks: 1) Currency Risk 2) Exchange 3) Political

UTMA

UTMA and UGMA accounts are custodial accounts. They are for the benefit of the child and bear the child's Social Security number. Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child). You CANNOT use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted. UTMA - can designate the age up to 25 Any adult can give a gift to a minor in a custodial account. There is no limitation on the size of the gift. However, any gift in excess of $17,000 (or such higher number as indexing provides for) will possibly subject the donor to a gift tax liability. Once a gift is given to a minor, it cannot be reclaimed.

Sweep Account

When customers sell securities held in their accounts, cash representing the proceeds of those sales are deposited to their accounts. In many cases, that cash is swept into a money market mutual fund where it will earn income until the money is either withdrawn or used for a new purchase. This is known as a sweep account.

Adjusted Gross Income (AGI)

When you do your taxes, you begin by listing all of your earned income (salary, wages, and bonuses) plus other income such as interest and dividends, capital gains, alimony received, and profits from a business you may own. From that total, you deduct certain items to arrive at the AGI. Among the more testable items that are deductible are - Traditional IRA contribution - Alimony paid as part of a pre-January 1, 2019, divorce decree - Self-employment tax - Penalties paid on early withdrawal from a savings account. *Although tax-exempt income from municipal securities is shown on Form 1040, it is NOT included in AGI

Laddering Strategy

With bonds maturing every year, the investor is reinvesting the principal at current market rates. In a period of rising inflation, interest rates follow along, so annually, the maturing bonds will be used to purchase new bonds with higher coupons.

Withdrawals From Traditional IRA

You can postpone beginning distributions until the later of: - April 1 of the calendar year after you turn age 72 or - April 1 of the calendar year following your retirement (but only for qualified plans, not an IRA). *Assume questions are about traditional IRAs unless they specifically state otherwise *Income and capital gains earned from investments in any IRA account are NOT taxed until the funds are withdrawn and, if a qualified withdrawal, are NOT taxed at all in the case of a Roth. IRS MANDATES: - Required Beginning Date (RBD) (Starting distributions) - Required Minimum Distribution (RMD) (How Much)

Per Captia

by or for each person. A per capita figure is calculated by dividing the total amount of something by the number of people in a place.

New Account Form (Options)

- Investment objective(s) (e.g., safety of principal, income, or growth) - Employment status (name of employer, self-employed, or retired) - Estimated annual income from all sources - Estimated net worth (exclusive of residence) - Estimated liquid net worth (cash, securities, etc.) - Marital status and number of dependents - Legal age (whether the customer has reached the age of majority in that state) In addition, the customer's account record may contain the following information (if applicable): - Investment experience and knowledge (e.g., number of years, size, frequency, and types of transactions for options, stocks, bonds, other) - Source(s) of background and financial information for the customer - Date the ODD was furnished to the customer (not later than the date the account is approved for options trading) - Nature and types of transactions for which the account is approved (e.g., buying, uncovered writing, or spreading) - Whether this a retail (natural person) account or institutional account - Signature of the registered representative introducing the account - Signature of the registered options principal (ROP) or the general sales supervisor approving the account and the date of approval **If the signed option agreement is not returned within 15 days of account approval, the firm can permit closing transactions only. Options Order: 1) Obtain essential facts from the customer 2) Obtain approval from the branch manager 3) Enter the initial order 4) Obtain a signed options agreement

Commercial Paper

- Issued by corporations (especially finance companies) to raise working capital - Exempt from registration from Federal and State with maximum maturity of 270 days - Highly liquid, safe

Investment Advisor Representative (IAR)

- No record keeping requirements ***An IAR only notifies administrator if IA is covered ***An IAR and IA notify administrator when its state Federal: - Register with STATE administrators - Only register in state in which you maintain office** NOT REGISTER: - If you have no office in state - Don't register STATE: -Register if office in state or client with residence NOT REGISTER: - No office and MORE than 5 clients Fed IAR - Must register ONLY in states in which they maintain an office (place of business) State IAR -Must register only in states in which they maintain an office or have more than 5 clients in a state IA Vs IAR Registered investment advisers, but not their representatives, are permitted to maintain custody of client assets (if not prohibited by the Administrator). There is no minimum net worth standard for IARs like there is for IAs. Both may be granted written discretionary powers, and if so, only the IA may be required to be bonded (adequate net worth will suffice).

Certificates of Deposit (CDs) (Time Deposit)

- Non-negotiable - Can't sell to anyone, ONLY redeem at bank Benefits: - Available with min deposit as little as $500 - 3 months to 5 year maturities *Capital Preservation with NO risk = Insured Bank CD *NO interest rate risk Risks: - Early withdrawal penalty - Inflation risk - Low yields (Not long term investment)